1 Equity Analysis and Valuation

SFM COMPILER Equity Analysis & Valuation
CHP ‐ 1 EQUITY ANALYSIS AND VALUATION
Years May Nov

RTP Paper RTP Paper
2008 NA NA Yes No
2009 Yes Yes Yes Yes
2013 No Yes Yes Yes
2015 Yes No Yes Yes
2016 Yes Yes No No
2016 Yes Yes No Yes
2018 (Old) Yes No Yes Yes
2018 (New) Yes Yes Yes Yes
2019(New) Yes Yes Yes Yes
2019 (Old) Yes Yes No Yes
2020(New) Yes No No No
2020 (Old) Yes No No No
2008
Question 1 Nov 2008 RTP
The total market value of the equity share of Raheja Company is Rs.90,00,000 and the total value of
the debt is Rs.60,00,000. The treasurer estimated that the beta of the stock is currently 1.9 and that
the expected risk premium on the market is 12 per cent. The treasury bill rate is 9 per cent.
Required :
(1) What is the beta of the Company’s existing portfolio of assets?
(2) Estimate the Company’s Cost of capital and the discount rate for an expansion of the company’s
present business.
Solution :
1) Beta of Company’s existing Portfolio
β Assets = β Liabilities
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Equity Analysis & Valuation SFM COMPILER
β Liabilities = Wt β Equity + wt β Debt

Since β Debt is not given to us, we assume it to be Zero
Equity = 90,00,000
Debt = 60,00,000
Total = 1,50,00,000
Therefore, β Assets = 1.9 x 90/150 = 1.14
2) Cost of Capital
Ke = Rf + β (RM – Rf)
Ke = Cost of Capital
Rf = Risk Free Rate
RM = Market Return
Rm – RF = Market Risk Premium
Therefore, = 9% + 1.14 x 12% = 22.68%

A share of Tension‐out Economy Ltd. is currently quoted at, a price earning ratio of 7.5 times. The
retained earnings per share being 37.5% is Rs.3 per share. Compute:
(1) The company’s cost of equity, if investors expect annual growth rate of 12%.
(2) If anticipated growth rate is 13% p.a., calculate the indicated market price, with same cost of
capital.
(3) If the company’s cost of capital is 18% and anticipated growth rate is 15% p.a., calculate the
market price per share, assuming other conditions remain the same.
Solution :
Retained Earning = Rs.3 = 37.5%
 3 
Earnings = Rs.8  
 37.5% 
Dividend = Rs.5 (8 – 3)
P.E. ratio = 7.5
MPs = EPs  P.E. = 8  7.5 = Rs.60/share
D1
IV = Re ‐ g
A) Re = ?, if g = 12%
5
60 = Re = 20.33%
Re  0.12
B) If g = 13%
5
IV = = Rs.68.21/share
0.2033  0.13
C) If Re = 18%, g = 15%
5
IV = = Rs166.67/share
0.18  0.15
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Truly Plc presently paid a dividend of £1.00 per share and has a share price of £. 20.00.
(i) If this dividend were expected to grow at a rate of 12% per annum forever, what is the firm’s
expected or required return on equity using a dividend‐discount model approach?
(ii) Instead of this situation in part (i), suppose that the dividends were expected to grow at a rate
of 20% per annum for 5 years and 10% per year thereafter. Now what is the firm’s expected,
or required, return on equity?
Solution :
(i) Dividend are expected to grow at 12% per annum forever
D1
IV =
Re-g
1.2
20 =
Re  0.12
Re = 18%
(ii) If the dividend are expected to grow at the rate of 20% for 5 years and 10% thereafter
WE will have to use the concept of Trial and Error to get the answer i.e. IV = 20
Let say Re = 20%
IV for first years (Stage 1)
Yrs Dividend Pv (20%)
1 1.2 1
2 1.44 1
3 1.73 1
4 2.07 1
5 2.49 1
Total 5
Iv for Next Years (Stage 2)

D6
IV5 =
Re - g
2.49(1.1)
= = 27.39
0.2  0.1
27.39
IV0 = = 11
1.2 
5
Total Iv (Stage 1 + Stage 2) = 5 + 11 = 16

Since IV is 16 which is less than 20, we will have to reduce the discounting rate to get to 20
Let say Re = 18%
IV for first years (Stage 1)
Yrs Dividend Pv (18%)
1 1.2 1.02
2 1.44 1.03
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3 1.73 1.05
4 2.07 1.07
5 2.49 1.09
Total 5.26
Iv for Next Years (Stage 2)

D6
IV5 =
Re  g
2.49 1.1
= = 34.24
0.18  0.1
34.24
Iv0 = = 14.96
1.18 
5
Total IV (Stage 1 + Stage 2) = 20.21 which is a bit higher than 20

Therefore Re = 18.1 % (Approximately) (Alternatively we can also use formula for IRR)
2009
Question 4 May 2009 RTP
An investor is holding 2000 shares of X ltd. Current year dividend rate is Rs. 2 per share. Market price
of the share is Rs. 30 each. The investor is concerned about several factors are likely to change during
the next financial year as indicated below :
Current Year Next Year
Dividend paid / anticipated per share (Rs.) 2 1.8
Risk free rate 12% 10%
Market Risk Premium 5% 4%
Beta Value 1.3 1.4
Expected growth 9% 7%
In view of the above, advise whether the investor should buy, hold or sell the shares.
Solution :
Current Next
Re = Rf + (Rm – Rf) 12 + 1.3(5) = 18.5% 10 + 1.4(4) = 15.6%
D1 2 1.09  1.8 1.07 
IV = = =
Re - g 0.185  0.09 0.156  0.07
=Rs.22.95 /sh. Rs.22.40/sh.
Question 5 May 2009 Paper – 6 Marks

Calculate the value of share from the following information:
Profit of the company Rs. 290 crores
Equity capital of company Rs. 1,300 crores
Par value of share Rs. 40 each
Debt ratio of company 27%
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Long run growth rate of the company 8%

Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share Rs. 47
Depreciation per share Rs. 39
Change in Working capital Rs. 3.45 per share
Solution :
FCFE1
IV =
Ke - g
FCFE = PAT – NI (Net Investment)
PAT = 290 Crores
PAT/Shares i.e EPS =
No of shares = 1300 / 40 = 32.5 Crores
PAT 290
EPS = = = Rs. 8.923 per share
No.of shares 32.5
NI = [(Capital Spending – Depreciation) +  Working Capital] (1 – 0.27)
= [(47 – 39) + 3.45] (1‐0.27)
= 11.45 (1 – 0.27)
= 8.3585
FCFE = 8.923 – 8.3585 = 0.5645
Re = Rf + β (RM – Rf)
= 8.7 + 0.1 (10.3– 8.7) = 8.86%
0.5645 1.08 
IV = = Rs.70.89 / shares
0.0886  0.08

Consider the following operating information gathered from 3 companies that are identical except
for their capital structures:
P Ltd. Q Ltd. R Ltd.
Total invested capital € 100,000 € 100,000 € 100,000
Debt/assets ratio 0.80 0.50 0.20
Shares outstanding 6,100 8,300 10,000
Before‐tax cost of debt 14% 12% 10%
Cost of equity 26% 22% 20%
Operating income,(EBIT) € 25,000 € 25,000 € 25,000
Net Income € 8,970 € 12,350 € 14,950
Tax rate 35% 35% 35%
(a) Compute the weighted average cost of capital, WACC, for each firm.
(b) Compute the Economic Value Added, EVA, for each firm.
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(c) Based on the results of your computations in part b, which firm would be considered the best
investment? Why?
(d) Assume the industry PIE ratio generally is 15 x. Using the industry norm, estimate the price
for each share.
(e) What factors would cause you to adjust the PIE ratio value used in part d so that it is more
appropriate?
Solution :
(a)
WACC 14(1 – 0.35) 12(1 – 0.35) 10(1 – 0.35)
= i(l – t)
Kd 9.1 7.8 6.5
Ke 26% 22% 20%
= 9.1  0.8 + 26  = 7.8  0.5 + 22  = 6.5  0.2 + 20 
Kc = w + Ke + w + Kd
0.2 = 12.48% 0.5 = 14.9% 0.8 = 17.3%
(b)
EVA = NOPAT – Kc 25000 (1 – 0.35)
16250 16250
NOPAT = EVIT – Tax = 16250
100000  12.48% = 100000 14.9% = 100000  17.3% =
Kc = Capital  Kc
12480 14900 17300
EVA 3770 1350 –1050
(c) EVAP > EVAQ > EVAR; Thus, P Ltd. would be considered the best investment. The result should
have been obvious, given that the firms have the same EBIT, but WACCP < WACCQ < WACCR.
(d)
EBIT € 25,000 € 25,000 € 25,000
Interest* (11,200) (6,000) (2,000)
PBT 13,800 19,000 23,000
Tax (35%) (4,830) (6,650) (8,050)
Net income € 8,970 € 12,350 € 14,950
Shares 6,100 8,300 10,000
EPS € 1.470 € 1.488 € 1.495
Stock price: P/E = 15x € 22.05 € 22.32 € 22.425
*Interest P = €100,000(0.80)  0.14 = €11,200

Interest Q = €100,000(0.50)  0.12 = € 6,000
Interest R = €100,000(0.20)  0.10 = € 2,000
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(e) Given the three firms have substantially different capital structures, we would expect that
they also have different degrees of financial risk. Therefore, we might want to adjust the P/E
ratios to account for the risk differences.

Associated Advertising Agency (AAA) just announced that the current financial year’s income
statement reports its net income to be Rs.12,00,000. AAA’s marginal tax rate is 40 percent, and its
interest expense for the year was Rs.15,00,000. The company has Rs.80,00,000 of invested capital,
of which 60 percent is debt. In addition, AAA tries to maintain a weighted average cost of capital
(WACC) near 12 percent.
(a) Compute the operating income, or EBIT, AAA earned in the current year.
(b) What is AAA’s Economic Value Added (EVA) for the current year?
(c) AAA has 5,00,000 equity share outstanding. According to the EVA value you computed in part
b, how much can AAA pay in dividends per share before the value of the firm would start to
decrease? If AAA does not pay any dividends, what would you expect to happen to the value
of the firm?
Solution :
(a) Taxable income =Net income/(1‐ 0.40)
Taxable income= (Rs. 12,00,000)/(1‐ 0.40) = Rs. 20,00,000 = EBIT‐ Interest
EBIT = Taxable income + Interest
= Rs. 20,00,000 + Rs. 15,00,000
= Rs. 35,00,000
(b) EVA = EBIT(1‐ T)‐ (WACC X Invested capital)
= Rs. 35,00,000(1‐ 0.40)‐ (0.12 X Rs. 80,00,000)
= Rs. 21,00,000 ‐ Rs. 9,60,000
= Rs. 11,40,000
(c) EVA dividend = (Rs. 11,40,000)/500,000 = Rs. 2.28.
If AAA does not pay a dividend, we would expect the value of the firm to increase because it
will achieve higher growth, hence a higher level of EBIT. If EBIT is higher, then, all else equal,
the value of the firm will increase. (This assumes the firm has positive NPV projects in which
to invest.)
Question 8 Nov 2009 Paper – 6 Marks

Following Financial data are available for PQR Ltd. for the year 2008 :
(Rs. in lakh)
8% debentures 125
10% bonds (2007) 50
Equity shares (Rs. 10 each) 100
Reserves and Surplus 300
Total Assets 600
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Assets Turnovers ratio 1.1

Effective interest rate 8%
Effective tax rate 40%
Operating margin 10%
Dividend payout ratio 16.67%
Current market Price of Share 14
Required rate of return of investors 15%
You are required to:
(i) Draw income statement for the year
(ii) Calculate its sustainable growth rate
(iii) Calculate the fair price of the Company's share using dividend discount model, and
(iv) What is your opinion on investment in the company's share at current price?
Solution :
(i) Income Statement :
Sales
Asset turnover ratio = = 1.1
Assets
Total Assets = Rs. 600
Turnover Rs. 600 lakhs  11 = Rs. 660 lakhs
Interest
Effective interest rate = = 8%
Liabilities
Liabilities = Rs. 125 lakhs+50 lakhs = 175 lakh
Interest =Rs. 175 lakhs× 0.08 = Rs. 14 lakh
Operating Margin = 10%
Hence operating cost = (1‐0.10) Rs. 660 lakhs = Rs. 594 lakh
Dividend Payout = 16.67%
Tax rate = 40%
Income statement (Rs. Lakhs)
Sale 660
Operating Exp 594
EBIT 66
Interest 14
EBT 52
Tax @ 40% 20.80
EAT 31.20
Dividend @ 16.67% 5.20
Retained Earnings 26.00
(ii) G = br
G = Growth
b = Retention Ratio
r = ROE
8|Page
PAT 31.20
ROE = = = 7.8%
Equity 100  300
Retention Ratio = 100 – 16.67 = 83.33%
Growth = 83.33 x 7.8% = 6.5%
D1
(iii) IV =
Re - g
D = 5.2/10 = 0.52 per share
Ke = 15%
G = 6.5%
0.52  6.5%
IV = = Rs.6.51 per share
0.15  0.065
(iv) Since the current market price of share is Rs.14, the share is overvalued. Hence the investor
should not invest in the company.

A firm had been paid dividend at Rs.2 per share last year. The estimated growth of the dividends from
the company is estimated to be 5% p.a. Determine the estimated market price of the equity share if
the estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also find out the present
market price of the share, given that the required rate of return of the equity investors is 15.5%.
Solution :
D1
Current IV =
Re - g
2(1.05)
= = Rs.20/share
0.155  0.05
D1
IV (growth rate = 8%) =
Re - g
2(1.08)
= = Rs.28.8 /share
0.155  0.08
D1
IV (growth rate = 3%) =
Re - g
2 1.03 
= = Rs.16.48 /share
0.155  0.03
Note : IV and growth share direct relationship. Higher the growth, higher the share price and vice
versa.
2010
Suppose you are verifying a valuation done on an established company by a well‐known analyst has
estimated a value of Rs.750 lakhs, based upon the expected free cash flow next year, of Rs.30 lakhs,
and with an expected growth rate of 5%.
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You found that, he has made the mistake of using the book values of debt and equity in his
calculation. While you do not know the book value weights he used, you have been provided
following information:
(a) Company has a cost of equity of 12%.
(b) After‐tax cost of debt of 6%.
(c) The market value of equity is three times the book value of equity, while the market value of
debt is equal to the book value of debt.
You are required to estimate the correct value of company.
Solution :
Step 1:
30
= 750 =
Kc - 0.05
Kc = 9%
Step 2:
Let X be the weight of Debt, then weight of equity = 1 ‐ x
Given Cost of equity = 12%;
Cost of debt = 6% then
12% (1‐X) + 6% X =9
Hence X = 0.50 : So book value weight for debt was 50%
Step3:
The above wts were based on book value. Weight based on market value will be
Equity = 0.5  3 = 1.5
Debt = 0.5  1 = 0.5
Total 2
Step 4:
Kc based or market value weights
1.5 0.5
12  +8 = 10.5
2 2
Step 5:
30
= = 545.45 lakhs
0.105  0.05
Correct firm value = Rs. 545.45 lakhs

ABC (India) Ltd., a market leader in printing industry, is planning to diversify into defense equipment
businesses that have recently been partially opened up by the GOI for private sector. In the
meanwhile, the CEO of the company wants to get his company valued by a leading consultants, as he
is not satisfied with the current market price of his scrip.
He approached a consultant with a request to take up valuation of his company with the following
data for the year ended 2009:
10 | P a g e
Share Price Rs.66 per share

Outstanding debt 1934 lakh
Number of outstanding shares 75 lakh
Net income 17.2 lakh
EBIT 245 lakh
Interest expenses 218.125 lakh
Capital expenditure 234.4 lakh
Depreciation 234.4 lakh
Working capital 44 lakh
Growth rate 8% (from 2010 to 2014)
Growth rate 6% (beyond 2014)
Free cash flow 240.336 lakh (year 2014 beyond)
The capital expenditure is expected to be equally offset by depreciation in future and the debt is
expected to decline by 30% by 2014.
Required:
Estimate the value of the company and ascertain whether the ruling market price is undervalued as
felt by the CEO based on the foregoing data. Assume that the cost of equity is 16%, and 30% of debt
repayment is made in the year 2014.
Solution :
1) EBIT 245
– Int. 218.125
EBT 26.875
– Tax 9.675
EAT 17.2
.
2) Tax rate =  100 = 36%
.
218.125
3) % Interest = 1934  100 = 11.28%
4)
Kc for 1st 5 years Kc beyond 5 yrs.
Ke = 16% Ke = 16%
Kd = 11.28(1 – 0.36) = 7.22% Debt = 1934  0.7 = 1353.8
MV of equity = 75  66 = Rs. 4950 Equity = 4950
Debt = 1934 Total 6303.8
Total = 6884 4950 1353.8
Kc = 6303.8 16% + 6303.8 7.22% = 14.11%
4950 1934
Kc = 6884  16 6884+  7.22 = 13.53%
5)
Stage 1
2009 2010 2011 2012 2013 2014 2015
1) NOPAT
11 | P a g e
EBIT 245 264.6 285.768 308.629 333.32 359.98

245  (8%)
‐Tax (30%)
NOPAT 169.34 182.89 197.5 213.32 230.39
2) NI
CS‐Dep. ‐ ‐ ‐ ‐ ‐
WC 3.52 3.801 4.11 4.43 4.79
(44  8%)
NI 3.52 3.801 4.11 4.43 4.79
FCFF 165.82 179.089 193.39 208.89 225.6 240.336
DF 0.881 0.776 0.683 0.602 0.530
DCF 146.08 138.97 132.09 125.75 119.56
Total = 662.45
6) Stage 2
FCFF6 240.336
V5 = =
Ke - g 0.1411  0.06
= 2963.45
V0 = 2963.45  0.530 = 1570.6298
7) Total value of firm = 662.45 + 1570.6298 = 2233.0798
Less Value of debt 1934
Value of 299.0798
299.0798
Value of equity = Rs.3.9877 /share
75
Herbal Gyan is a small but profitable producer of beauty cosmetics using the plant Aloe Vera. This is
not a high‐tech business, but Herbal’s earnings have averaged around Rs.12 lakh after tax, largely on
the strength of its patented beauty cream for removing the pimples.
The patent has eight years to run, and Herbal has been offered Rs.40 lakhs for the patent rights.
Herbal’s assets include Rs.20 lakhs of working capital and Rs.80 lakhs of property, plant, and
equipment. The patent is not shown on Herbal’s books. Suppose Herbal’s cost of capital is 15 percent.
What is its Economic Value Added (EVA)?
Solution :
EVA = Income earned– (Cost of capital x Total Investment)
Total Investments
Particulars Amount
Working capital Rs.20 lakhs
Property, plant, and equipment Rs.80 lakhs
12 | P a g e
Patent rights Rs.40 lakhs

Total Rs.140 lakhs
Cost of Capital 15%
EVA = Rs.12 lakh– (0.15 x Rs.140 lakhs)
= Rs.12 lakh– Rs.21 lakh = ‐ Rs.9 lakh
Thus Herbal Gyan has a negative EVA of Rs.9 lakhs.

The following information is given for 3 companies that are identical except for their capital structure:
Orange Grape Apple
Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Shares outstanding 6,100 8,300 10,000
Pre tax cost of debt 16% 13% 15%
Cost of equity 26% 22% 20%
Operating Income (EBIT) 25,000 25,000 25,000
Net Income 8,970 12,350 14,950
The tax rate is uniform 35% in all cases.
(i) Compute the Weighted average cost of capital for each company.
(ii) Compute the Economic Valued Added (EVA) for each company.
(iii) Based on the EVA, which company would be considered for best investment? Give reasons.
(iv) If the industry PE ratio is 15x, estimate the price for the share of each company.
(v) Calculate the estimated market capitalisation for each of the Companies.
Solution :
(a)
Orange Grape Apple
WACC 14(1 – 0.35) 12(1 – 0.35) 10(1 – 0.35)
= i(l – t)
Kd 9.1 7.8 6.5
Ke 26% 22% 20%
= 9.1  0.8 + 26  = 7.8  0.5 + 22  = 6.5  0.2 + 20 
Kc = w + Ke + w + Kd
0.2 = 12.48% 0.5 = 14.9% 0.8 = 17.3%
(b)
Orange Grape Apple
EVA = NOPAT – Kc 25000 (1 – 0.35)
16250 16250
NOPAT = EVIT – Tax = 16250
100000  12.48% = 100000 14.9% = 100000  17.3% =
Kc = Capital  Kc
12480 14900 17300
EVA 3770 1350 –1050
13 | P a g e
(c) EVAP > EVAQ > EVAR; Thus, P Ltd. would be considered the best investment. The result should
have been obvious, given that the firms have the same EBIT, but WACCP < WACCQ < WACCR.
(d)
Orange Grape Apple
EBIT € 25,000 € 25,000 € 25,000
Interest* (11,200) (6,000) (2,000)
PBT 13,800 19,000 23,000
Tax (35%) (4,830) (6,650) (8,050)
Net income € 8,970 € 12,350 € 14,950
Shares 6,100 8,300 10,000
EPS € 1.470 € 1.488 € 1.495
Stock price: P/E = 15x € 22.05 € 22.32 € 22.425
*Interest P = €100,000(0.80)  0.14 = €11,200

Interest Q = €100,000(0.50)  0.12 = € 6,000
Interest R = €100,000(0.20)  0.10 = € 2,000
(e) Given the three firms have substantially different capital structures, we would expect that
they also have different degrees of financial risk. Therefore, we might want to adjust the P/E
ratios to account for the risk differences.
Question 14 Nov 2010 ‐ RTP

From the following data compute the value of business using EVA method.
Current Period Projected Periods
2010 2011 2012
Total Invested Capital 90,00,000 1,00,00,000 1,10,00,000
Adjusted NOPAT 12,60,000 14,00,000 16,00,000
WACC 8.42%
Capital Growth (g) is projected = 6.5% per year after 2012.
Solution :
Valuation Equation
EVAt = NOPATt – (Total Invest Capitalt x WACCt)
EVA1 = Rs.14,00,000 – (Rs.1,00,00,000 X 0.0842) = Rs.5,58,000
EVA2 = Rs.16,00,000 – (Rs.1,10,00,000 X 0.0842) = Rs.6,73,800
Total Valuation Equation
 
 
=
558000

673800
  673800 1  0.065  
1.0842 1.0842 2  0.0842  0.065 
 
1.0842 
2
 
= Rs.5,14,665 + Rs.5,73,207 + Rs.3,17,95,128 + Rs.90,00,000
= Rs.4,18,83,000
14 | P a g e
Question 15 Nov 2010 – RTP

Using the chop shop approach ( or break up value approach ) assign a value for Cranberry Ltd. Whose
stock is currently trading at a total market price of €4 million. For Cranberry Ltd. The accounting data
set forth three business segments consumer wholesale, retail and general centers. Data for the firms
three segments are as follows :
Business Segment Segment Segment
Segment sales assets operating income
Whole sale €225,000 €600,000 €75,000
Retail €720,000 €500,000 €150,000
General €2,500,000 €4,000,000 €700,000
Industry data for pure play firms have been compiled and are summarized as follows :‐
Business Capitalization/Sales Capitalization Capitalization /
Segment Assets Operating Income
Wholesale 0.85 0.7 9
Retail 1.2 0.7 8
General 0.8 0.7 4
Solution :
Wholesale
Sales 225000  0.85 = 191250
Assets 600000  0.7 = 420000 428750 (avg.)
Op.Inc. 75000  9 = 675000
Retail
Sales 720000  1.2 = 864000
Assets 500000  0.7 = 350000 804666.67
Op.Inc. 150000  8 = 1200000
General
Sales 2500000  0.8 = 2000000
Assets 4000000  0.7 = 2800000 2533333.33
Op.Inc. 700000  4 = 2800000 __________
TOTAL 3766750

Amal Ltd. has been maintaining a growth rate of 12% in dividends. The company has paid dividend
@ Rs.3 per share. The rate of return on market portfolio is 15% and the risk free rate of return in the
market has been observed as10% . The beta co‐efficient of the company’s share is 1.2. You are
required to calculate the expected rate of return on the company’s shares as per CAPM model and
the equilibrium price per share by dividend growth model.
15 | P a g e
Solution :
Re = Rf + β(Rm – Rf)
= 10 + 1.2 (15 – 10)
= 10 + 6 = 16%
D1
IV =
Re - g
3 x (1.12)
= 0.16 ‐ 0.12 = Rs.84/share

Delta Ltd.’s current financial year’s income statement reports its net income as Rs.15,00,000. Delta’s
marginal tax rate is 40% and its interest expense for the year was Rs.15,00,000. The company has
Rs.1,00,00,000 of invested capital, of which 60% is debt. In addition, Delta Ltd. tries to maintain a
Weighted Average Cost of Capital (WACC) of 12.6%.
1. Compute the operating income or EBIT earned by Delta Ltd. in the current year.
2. What is Delta Ltd.’s Economic Value Added (EVA) for the current year?
3. Delta Ltd. has 2,50,000 equity shares outstanding. According to the EVA you computed in (ii),
how much can Delta pay in dividend per share before the value of the company would start
to decrease? If Delta does not pay any dividends, what would you expect to happen to the
value of the company?
Solution :
1) Operating Income (EBIT)
NPAT 15,00,000
+ tax. (40%) 10,00,000
NPBT 25,00,000
+ Int. 15,00,000
EBIT 40,00,000
2) EVA = NOPAT – Kc
a) NOPAT = 40,00,000 – 40%
= 24,00,000
b) Cost of capital = 1,00,00,000  12.6
= Rs. 12,60,000
c) EVA = 24,00,000 – 12,60,000
= 11,40,000
11, 40, 000
3) Max. dividend per share = = 4.56/share
2, 50, 000
The value of firm will increase provided NPV is positive.
16 | P a g e
A valuation done of an established company by a well‐known analyst has estimated a value of Rs.500
lakhs, based on the expected free cash flow for next year of Rs.20 lakhs and an expected growth rate
of 5%.
While going through the valuation procedure, you found that the analyst has made the mistake of
using the book values of debt and equity in his calculation. While you do not know the book value
weights he used, you have been provided with the following information:
(i) Company has a cost of equity of 12%,
(ii) After tax cost of debt is 6%,
(iii) The market value of equity is three times the book value of equity, while the market value of
You are required to estimate the correct value of the company.
Solution :
FCFF1
Vo = Kc ‐ 1
20
500 = Kc ‐ 0.05
Kc = 0.09 i.e 9%
Let the weight of the debt be x
Wt of Equity will be (1‐x)
WACC = Wt debt + Wt Equity
= 12(1 – x) + 6(x) = 9
X = 0.5 ‐‐‐ these were old weights
i.e equity and debt were 50 – 50 (book values), however equity shall be 50 x 3 = 150 and debt shall
be 50 x 1 = 50. This puts the weights to 75 : 25 (Equity/Debt)
New WACC = 12 (0.75) + 6(0.25) = 10.50%
FCFF1 20
Vo = Kc ‐ 1 = 0.105 ‐ 0.05 = Rs.363.64
2011
Question 19 May 2011 ‐ RTP
Calculate Economic Value Added (EVA) with the help of the following information of Hypothetical
Limited:
Financial leverage : 1.4 times
Capital structure : Equity Capital Rs.170 lakhs
Reserves and surplus Rs.130 lakhs
10% Debentures Rs.400 lakhs
Cost of Equity : 17.5%
Income Tax Rate : 30%.
Solution :
EBIT 140 1.4
17 | P a g e
– Int 40 0.4
EBT 100 1.0
40
EBIT = 0.4 1.4 = 140
NOPAT = EBIT (1 – t) = 140(1 – 0.3) = 98
Ke = 17.5%
Kd = 10(1 – 0.3) – 7%
300 400
WACC = × 17.5 + × 7%
700 700
Cost of capital = 700  11.5% = 80.5
EVA = 98 – 80.5 = 17.5

A share of Tension‐free Economy Ltd. is currently quoted at, a price earning ratio of 7.5 times. The
retained earnings per share being 37.5% is Rs.3 per share. Compute:
(1) The company’s cost of equity, if investors expect annual growth rate of 12%.
(2) If anticipated growth rate is 13% p.a., calculate the indicated market price, with same cost of
capital.
(3) If the company’s cost of capital is 18% and anticipated growth rate is 15% p.a., calculate the
market price per share, assuming other conditions remain the same.
Solution :
 3 
Earnings = Rs.8 37.5%
 
P.E. ratio = 7.5
MPs = EPs  P.E. = 8  7.5
= Rs.60/share
Re = ?, if g = 12%
D1
A) IV = Re ‐ g
5(1.12)
60 = Re ‐ g Re = 21.33%
B) If g = 13%
5(1.13)
IV = 0.2133 ‐ 0.13 = Rs.67.83/share
C) If Re = 18%, g = 15%
5(1.15)
IV =0.18 ‐ 0.15 = Rs.191.67/share
18 | P a g e

Given below is the Balance Sheet of S Ltd. as on 31.3.2010:
Liabilities Rs.(in lahks) Assets Rs.(in lakhs)
Share Capital 100 Land and Building 40
(share of Rs. 10) Plant and Machinery 80
Reserves and Surplus 40 Investments 10
Creditors Stock 20
30 Debtors 15
Cash at Bank 5
170 170
You are required to work out the value of the Company's, shares on the basis of Net Assets method
and Profit‐earning capacity (capitalization) method and arrive at the fair price of the shares, by
considering the following information:
(i) Profit for the current year Rs. 64 lakhs includes Rs. 4 lakhs extraordinary income and Rs. 1 lakh
income from investments of surplus funds; such surplus funds are unlikely to recur.
(ii) In subsequent years, additional advertisement expenses of Rs. 5 lakhs are expected to be
incurred each year.
(iii) Market value of Land and Building and Plant and Machinery have been ascertained at Rs. 96
lakhs and Rs. 100 lakhs respectively. This will entail additional depreciation of Rs. 6 lakhs each
year.
(iv) Effective Income‐tax rate is 30%.
(v) The capitalization rate applicable to similar businesses is 15%.
Solution :
1) Net Assets Value
Assets (R.V.)
L&B 96
P&M 100
Investments 10
Stock 20
Debtors 15
Cash / Bank 5 246
Less Liabilities (R.V.)
Creditors 30
Net Assets 216
Net Assets for ESH
I.V. = No. of shares
216
= 10
= Rs.21.6/share
2) Yield value
19 | P a g e
ERR
Profit 64
‐ Extra Inc. (4)
‐ Inc. from Inv. (1)
‐ Add. Exp. (5)
‐ Add. Dep. (6)
NPBT 48
‐ tax @ 30% 14.4
NPAT 33.6
33.6
ERR = 100  100 = 33.6%
(Capital)
NRR = 15%
33.6 33.6
Yield =  100 =  100 = 22.4/share
NRR 15
IV+Yield
3) Fair value =
2
21.6  22.4
=
2
= Rs.22/share
Question 22 May 2011 ‐ Paper – 8 Marks

A share of Voyage Ltd. is currently quoted at, a price earning of 8 times. The retained earnings per
share being 45% is 5 per share. Compute
(i) The company’s cost of equity, if investors expect annual growth rate of 15%
(ii) If anticipated growth rate is 16% p.a, calculate the indicated market price, with same cost of
capital.
(iii) If the company’s cost of capital is 20% and the anticipated growth rate is 19% p.a. calculate
the market price per share, assuming other conditions remaining the same.
Solution :
Retained Earning = Rs.5 = 45%
 5 
Earnings = Rs.11.11  
 45% 
Dividend = Rs.6.11 (11.11 – 5)
P.E. ratio =8
MPs = EPS  P.E. = 11.11  8
= Rs.88.88/share
A) Re = ?, if g = 15%
D1
IV =
Re - g
20 | P a g e
6.11
88.88 = Re = 21.87%
Re - 0.15
B) If g = 16%
6.11
IV = = Rs.104.08/share
0.2287  0.16
C) If Re = 20%, g = 19%
6.11
IV = = Rs.611/share
0.20  0.19
Tender Ltd. has earned a net profit of 15 lacs after tax at 30%. Interest cost charged by financial
institutions was 10 lacs. The invested capital is 95 lacs of which 55% is debt. The company maintains
a weighted average cost of capital of 13%.
Required
(a) Compute the operating income.
(b) Compute the Economic Value Added (EVA).
(c) Tender Ltd. has 6 lac equity shares outstanding. How much dividend can the company pay
before the value of the entity starts declining?
Solution :
(a) Operating Income
NPAT 15 70%
15
NPBT = = 21.42
70%
EBIT = 21.42 + 10 = 31.42
(b) EVA = NOPAT – Cost of Capital
(i) NOPAT
EBIT 31.42
‐tax (30%) ____
NOPAT Rs. 22
(ii) Cost of Capital = 95  13%
= Rs. 12.35
 EVA = 22 – 12.35
= 9.65
(c) The maximum amount that a company can pay before the value of entity starts decreasing is
equal to EVA.
9.65
Max. dividend per share = 6 = Rs.1.608/share
Question 24 Nov 2011 ‐ RTP

ABC Ltd. has divisions A,B & C. The division C has recently reported on annual operating profit of Rs.
20,20,00,000. This figure arrived at after charging Rs. 3 crores full cost of advertisement
21 | P a g e
expenditure for launching a new product. The benefits of this expenditure is expected to be lasted
for 3 years.
The cost of capital of division C is 11% and cost of debt is 8%.
The Net Assets (Invested Capital) of Division C as per latest Balance Sheet is Rs.60 crore, but
replacement cost of these assets is estimated at Rs.84 crore
You are required to compute EVA of Division C.
Solution :
First necessary adjustment of the data as reported by historical accounting system shall be made as
follows:
Rs.
Operating Profit 20,20,00,000
Add: Cost of unutilized Advertisement Expenditures 2,00,00,000
22,20,00,000
Invested Capital (as per replacement cost) is Rs.84 crore.
Accordingly,
EVA = Operating Profit – (Invested Capital x Cost of Capital)
= Rs.22,20,00,000 – (Rs.84 crore x 11%)
= Rs.22.2 crore – Rs.9.24 crore
= Rs.12.96 crore.

The total market value of the equity share of O.R.E. Company is Rs.60,00,000 and the total value of
the debt is Rs. 40,00,000. The treasurer estimate that the beta of the stock is currently 1.5 and that
the expected risk premium on the market is 10 per cent. The treasury bill rate is 8 per cent.
Required
(1) What is the beta of the company’s existing portfolio of assets?
(2) Estimate the company’s cost of capital and the discount rate for an expansion of the
company’s present business?
Solution :
β Liabilities = Wt β Equity + wt β Debt
Equity = 60,00,000
Debt = 40,00,000
Total = 1,00,00,000
2) Cost of Capital
22 | P a g e
Ke = Cost of capital
Rf = Risk Free Rate
RM = Market Return
Rm – RF = Market Risk Premium
Therefore, Ke = 8 + 0.9 x 10 = 17%
Question 26 Nov 2011 Paper – 5 Mark

A company has a book value per share of Rs. 137.80. Its return on equity is 15% and follows a policy
of retaining 60 percent of its annual earnings. If the opportunity cost of capital is 18 percent, what is
the price of its share?[adopt the perpetual growth model to arrive at your solution].
Solution :
EPS = 137.80 x 15% = 20.67
Dividend = 20.67 x 40% (Retention is 60%) = 8.268
G = br
= 60 x 15% = 9%
D1 = 8.268 x 1.09 = 9.01
D1
IV =
Re - g
9.01
= 0.18 ‐ 0.09 = Rs. 100.11/share
Similar to ‐ Question 15 – Nov 2010 – RTP
Question 28 Nov 2011 ‐ Paper – 8 Marks

Helium Ltd has evolved a new sales strategy for the next 4 years. The following information is given:
Income Statement Rs. in thousands
Sales 40,000
Gross Margin at 30% 12,000
Accounting, administration and distribution expense at 15% 6,000
Profit before tax 6,000
Tax at 30% 1,800
Profit after tax 4,200
Balance sheet information
Fixed Assets 10,000
Current Assets 5,000
Equity 15,000
23 | P a g e
As per the new strategy, sales will grow at 30 percent per year for the next four years. The gross
margin ratio will increase to 35 percent. The Assets turnover ratio and income tax rate will remain
unchanged.
Depreciation is to be at 15 percent on the value of the net fixed assets at the beginning of the year.
Company's target rate of return is 14%.
Determine if the strategy is financially viable giving detailed workings
Solution :
1) Value of firm before strategy
FCFE(PAT) 4200
Vf = = = Rs.30,000
Ke 14%
2) Value of firm after the strategy
a) Stage 1
FCFE 1 2 3 4
PAT 5460 7098 9227.4 11995.62
(4200 + 305)
– NI 4500 5850 7605 9556.50
(15000  30%)
960 1248 1622.4 2109.12
PV @14% 842.11 960.30 1095.07 1248.77
Total = 4146.25
b) Stage 2
FCFE5 11995.62
Vf4 = = = 85683
Ke 0.14
85683
Vf0 = = 50731.21
1.144
Total value = 50731.21 + 4143.25 = 54877.46
3) Value of strategy
Value of firm Af strategy 54877.46
Value of firm Bf strategy 30000
24877.46
Advice : Since value of strategy is positive the firm should implement the strategy.
2012
The following data pertains to XYZ Inc. engaged in software consultancy business as on 31 December
2010
$ Million
Income from consultancy 935.00
EBIT 180.00
Less : Interest on Loan 18.00
EBT 162.00
24 | P a g e
Tax @ 35% 56.70

105.30
Liabilities Amount Assets Amount
Equity share (10 million shares of Rs.10 100 Land and Building 200
each)
Reserves 325 Computers & Software 295
Bank Loan 180 Current Assets :
Creditors 180 Debtors 150
Bank 100
Cash 40
785 785
With the above information and following assumption you are required to compute
(a) Economic Value Added®
(b) Market Value Added.
Assuming that:
(i) WACC is 12%.
(ii) The share of company currently quoted at Rs. 50 each
Solution :
1) EVA = NOPAT – Cost of Capital
NOPAT = EBIT (1 – t)
= 180 (1 – 0.35)
= 117
Kc = Capital = 100 + 325 + 180 = 605
= 605  12% = 72.6
EVA = 117 – 72.6 = 44.4
2) MVA
MV BV
Equity Capital 500 100
Reserves ‐ 325
Debt 180 180
Total 680 605
MVA = MV – BV
= 680 – 605
= 75

Following informations are available in respect of XYZ Ltd. which is expected to grow at a higher rate
for 4 years after which growth rate will stabilize at a lower level:
25 | P a g e
Base year information:

Revenue ‐ Rs. 2,000 crores
EBIT ‐ Rs. 300 crores
Capital expenditure ‐ Rs. 280 crores
Depreciation ‐ Rs. 200 crores
Information for high growth and stable growth period are as follows:
High Growth Stable Growth
Growth in Revenue & EBIT 20% 10%
Growth in capital expenditure and 20% Capital expenditure are
Depreciation offset by depreciation
Equity beta 1.15 1
Market risk premium 6% 5%
Pre tax cost of debt 13% 12.86%
Debt equity ratio 1:1 2:3
For all time, working capital is 25% of revenue and corporate tax rate is 30%.
What is the value of the firm?
Solution :
1)
Satge 1 Ke Stage 2 Kc
Re = Rf + (Rm – Rf) Re = 9 + 1 (5) = 14%
= 10 + 1.15 (6) Kd = 12.86 (1 – 0.3) = 9%
= 16.9% 2 3
Kc = 5 x 9 + 5 x 14 = 12%
Kd = i (1 – t) = 13 (1 – 0.3)
= 9.1%
Kc = Kc 0.5 x 9.1 + 0.5 x 16.9
= 13%
2) Stage 1
Base 1 2 3 4 5
1) NOPAT
EBIT 300 360 432 518.4 622.08 684.288
(300 + 20%) (622.08 + 10%)
‐Tax (30%) NOPAT 103 129.6 155.52 186.62 205.286
252 302.4 362.88 435.46 479
2) Net
Invest
Capital Sp 280
26 | P a g e
–Dep 200 ‐ ‐ ‐ ‐
i) 80 96 115.2 138 165.8 Nil
(80 + 10%)
Revenue 2000 2400 2880 3456 4147.2 4561.92
(2000 + 20%) (4147.2 + 10%)
WC 500 600 720 864 1036.8 1140.48
ii) WC 100 120 144 172.8 103.68
NI(i +ii) 196 235.2 282 338.6 103.68
FCFF = (NOPAT – 56 67.2 80.88 96.856 375.32
NI)
PV @ 13% 49.56 52.61 56.05 59.4
Total = 217.63
3) Stage 2
FCFF5 375.32
V4 = = 0.12 ‐ 0.1 = 18766
Kc - g
18766
V0 = = 11509.54
1.134
Total = Stage 1 + Stage 2
= 217.63 + 11509.54 = Rs.11727.17

AB Limited’s shares are currently selling at Rs.130 per share. There are 10,00,000 shares outstanding.
The firm is planning to raise Rs.2 crores to Finance new project.
Required
What is the ex‐right price of shares and value of a right, if.
(i) The firm offers one right share for every two shares held.
(ii) The firm offers one right share for every four shares held.
(iii) How does the shareholder’s wealth change from (i) to (ii)? How does right issue increase
shareholder’s wealth.
Solution :
1. Firm offer one right share for 2 shares held
10,00,000
No of shares to be issued = = 5,00,000 shares
2
2,00,00,00 0
Subscription Price = = Rs. 40 / shares
5,00,000
Ex Right Price =
10,00,000  130   2,00,00,000 = Rs.100
15,00,000
Value of Right = 100 – 40 = Rs. 60/share
27 | P a g e
2. Firm offer one right share for 2 shares held

10,00,000
No of shares to be issued = = 2,50,000 shares
4
2,00,00,00 0
Subscription Price = = Rs.80 / shares
2,50,000
13,00,00,0 00  2,00,00,00 0
Ex Right Price = = Rs.120
12,50,000
Value of Right = 120 – 80 = Rs. 40/share
3. Calculation of effect of right issue on shareholders wealth (Assuming he is holding 100 shares)
One share for 2 held One share for 4 held
Value of shares after right 15000 15000
(150 x 100) (125 x 120)
Less cost of right 2000 2000
(50 x 40) (25 x 80)
Net Value after right 13000 13000
Value before right 13000 13000
(100 x 130) (100 x 130)
Effect of right issue NIL NIL
Question 32 May 2012 Paper – Similar to ‐ Question 22 ‐ May 2011 ‐ Paper – 8 Marks

In December, 2011 AB Co.'s share was sold for Rs. 146 per share. A long term earnings growth rate
of 7.5% is anticipated. AB Co. is expected to pay dividend of Rs. 3.36 per share.
(i) What rate of return an investor can expect to earn assuming that dividends are expected to
grow along with earnings at 7.5% per year in perpetuity?
(ii) It is expected that AB Co. will earn about 10% on book Equity and shall retain 60% of earnings.
In this case, whether, there would be any change in growth rate and cost of Equity?
Solution :
(i) According to Dividend Discount Model approach the firm’s expected or required return on
equity is computed as follows:
D
Re = 1 + g
P0
Where
Ke = Cost of equity share capital
D1 = Expected dividend at the end of year 1
P0 = Current market price of the share.
g = Expected growth rate of dividend.
28 | P a g e
3.36
Therefore Ke = 146 + 7.5 = 9.80%
(ii) With rate of return on retained earnings (r) 10% and retention ratio (b) 60%, new growth rate
will be as follows:
g = br i.e.
= 0.10 x 0.60 = 0.06
Accordingly dividend will also get changed and to calculate this, first we shall calculate
previous retention ratio (b1) and then EPS assuming that rate of return on retained earnings
(r) is same.
With previous Growth Rate of 7.5% and r =10% the retention ratio comes out to be:
0.075 =b1 X 0.10
b1 = 0.75 and payout ratio = 0.25
With 0.25 payout ratio the EPS will be as follows:
3.36 = 13.44
0.25
With new 0.40 (1 – 0.60) payout ratio the new dividend will be
D1 = 13.44  0.40 = 5.376
5.376
Accordingly new Ke will be ke = 146 + 6.0 Ke = 9.68%

BRS Inc deals in computer and IT hardwares and peripherals. The expected revenue for the next 8
years is as follows
Years Sales Revenue ($ Million)
1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 20
st
Summarized financial position as on 31 March 2012 was as follows
Equity Stocks 12 Fixed Assets (Net) 17
12% Bond 8 Current Assets 3
20 20
Additional Information:
(a) Its variable expenses is 40% of sales revenue and fixed operating expenses (cash) are
estimated to be as follows:
Period Amount ($ Million)
29 | P a g e
1 – 4 years 1.6
5 – 8 years 2
(b) An additional advertisement and sales promotion campaign shah be launched requiring
expenditure as per following details:
1 year 0.50
2‐3years 1.50
4‐6years 3.00
7‐8years 1.00
(c) Fixed Assets are subject to depreciation at 15% as per WDV method.
(d) The company has planned capital expenditure for the coming 8 years as follows
1 0.50
2 0.60
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00
(e) Investment in working capital to be 20% of Revenue
(f) Applicable tax rate for the company is 30%
(g) Cost of Equity is estimated to be 16%
(h) The free cash flows of the firm is expected to grow at 5% per annum after 8 years
With above information you are required to determine the
(i) Value of the firm
(ii) Value of Equity
Solution :
1) Working note for depreciation
Year 1 2 3 4 5 6 7 8
Assets Op. 17 14.875 13.15375 12.881 13.074 14.088 14.1 13.26
+ Cap.sp. 0.5 0.6 2 2.5 3.5 2.5 1.5 1
Assets 17.5 15.475 15.15375 15.381 16.57 16.588 15.6 14.26
‐ Dep. 2.625 2.32125 2.273 2.3071 2.486 2.488 2.34 2.139
Assets Clo. 14.875 13.15375 12.881 13.074 14.088 14.1 13.26 12.121
2) Kc = 16%
Kd = i(1 – t)
= 12(1 – 0.3)
30 | P a g e
= 8.4%
12 8
WACC = 20  16% + 20  8.4%
= 12.96%
3) Calculation for NOPAT

Year 1 2 3 4 5 6 7 8
Sales 8 10 15 22 30 26 23 20
VC 3.2 4 6 8.8 12 10.4 9.2 8
FC 1.6 1.6 1.6 1.6 2 2 2 2
Adv. 0.5 1.5 1.5 3 3 3 1 1
Dep. 2.625 2.32125 2.2730 2.3071 2.4860 2.488 2.34 2.139
EBIT 0.075 0.58 3.627 6.2929 10.514 8.112 8.46 6.861
tax (30%)
NOPAT 0.0525 0.411 2.538 4.405 7.359 5.678 5.922 4.8027
4) Calculation for Net Investments

Year 1 2 3 4 5 6 7 8
Cap. Sp. 0.5 0.6 2 2.5 3.5 2.5 1.5 1
‐Dep. 2.625 2.32125 2.273 2.3071 2.4860 2.488 2.34 2.139
(2.125) (1.72125) (0.2730) 0.1929 1.012 0.01 (0.84) (1.139)
+WC 1.6 2 3 4.4 6 5.2 4.6 4
NI (0.525) 0.27875 (2.727) (4.5929) 7.014 5.212 3.76 2.861
5) FCFF
Year 1 2 3 4 5 6 7 8
(NOPAT – 0.5775 0.13225 (0.189) (0.1879) 0.345 0.466 2.162 1.9417
NI)
PV @ 0.511 0.1036 (0.131) (0.115) 0.188 0.224 0.921 0.732
12.96%
FCFF9
6) V8 = Kc ‐ g
1.9417(1.05)
=
0.1296  0.05
= 25.612
25.612
V0 (Stage 2) = = 9.66
1.12968
7) Value of firm = Stage II + Stage II
31 | P a g e
= 2.4336
= 2.4336 + 9.66
= 12.09
Value of equity = Value of Firm – Value of Debt
= 12.09 – 8
= 4.09

H Ltd. agrees to buy over the business of B Ltd. effective 1st April, 2012.The summarized Balance
Sheets of H Ltd. and B Ltd. as on 31st March 2012 are as follows:
Balance sheet as at 31st March, 2012 (In Crores of Rupees)
Liabilities: H. Ltd B. Ltd.
Paid up Share Capital
‐Equity Shares of Rs.100 each 350.00
‐Equity Shares of Rs.10 each 6.50
Reserve & Surplus 950.00 25.00
Total 1,300.00 31.50
Assets:
Net Fixed Assets 220.00 0.50
Net Current Assets 1,020.00 29.00
Deferred Tax Assets 60.00 2.00
Total 1,300.00 31.50
H Ltd. proposes to buy out B Ltd. and the following information is provided to you as part of the
scheme of buying:
(1) The weighted average post tax maintainable profits of H Ltd. and B Ltd. for the last 4 years
are Rs. 300 crores and Rs. 10 crores respectively.
(2) Both the companies envisage a capitalization rate of 8%.
(3) H Ltd. has a contingent liability of Rs. 300 crores as on 31st March, 2012.
(4) H Ltd. to issue shares of Rs. 100 each to the shareholders of B Ltd. in terms of the exchange
ratio as arrived on a Fair Value basis. (Please consider weights of 1 and 3 for the value of
shares arrived on Net Asset basis and Earnings capitalization method respectively for both H
Ltd. and B Ltd.)
You are required to arrive at the value of the shares of both H Ltd. and B Ltd. under:
(i) Net Asset Value Method (ii) Earnings Capitalisation Method
Solution :
Net Assets for Equity Shareholders
(i) Net Asset Value = No. of Shares
32 | P a g e
1300‐300
H Ltd. = 3.5 = Rs. 285.71 per share
31.5
B Ltd. = 0.65 = Rs. 48.46 per share
Earnings / NPR
(ii) Earning Capitalization Method = No. of Shares
300 / 0.08
H Ltd. = = Rs. 1071.43 per share
3.5
10 / 0.08
B Ltd. = = Rs. 192.31 per share
0.65
Net Assets Value + Earnings Capitalization Method
(iii) Fair Value = 2
285.71 x 1 + 1071.43 x 3
H Ltd. = 4 = Rs. 875 per share
48.46 x 1 + 192.31 x 3
B Ltd. = 4 = Rs. 156.3475 per share
156.3475
Exchange Ratio = 875 = 0.1787
H Ltd Should issue its 0.1787 share for each share of B Ltd.
Question 36 Nov 2012 Paper – 4 Marks – Similar to ‐ Question 19 ‐ May 2011 ‐ RTP

Eagle Ltd. reported a profit of Rs. 77 lakhs after 30% tax for the financial year 2011‐12. An analysis of
the accounts revealed that the income included extraordinary items of Rs.8 lakhs and an
extraordinary loss of Rs. 10 lakhs. The existing operations, except for the extraordinary items, are
expected to continue in the future. In addition, the results of the launch of a new product are
expected to be as follows:
Rs. In lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10
(i) Calculate the value of the business, given that the capitalization rate is 14%.
(ii) Determine the market price per equity share, with Eagle Ltd.‘s share capital being comprised
of 1,00,000 13% preference shares of Rs.100 each and 50,00,000 equity shares of Rs.10 each
and the P/E ratio being 10 times.
Solution :
(i) Value of Business
Existing Business New Business
33 | P a g e
Profit After Tax 77 Sales 70

Add : Tax (30%) 33 Less
Profit Before Tax 110 Material Cost 20 20
Less : Extra‐ordinary Income ‐8 Labour Cost 12 12
Add : Extra‐ordinary Expenses 10 Fixed cost 10 ‐42
Profit from existing Business 112 Profit 28
Total Profit Before Tax 140
Less : Tax (30%) 42
FMP (After Tax) 98
Profit 98
Value of Business = Capitalization Rate = 14% = 700
(ii) Market Price of Equity shares
Profit After Tax 98
Less Preference Dividend 13
Profits for Equity shareholders 85
No. of shares 50 Lakhs shares
EPS Rs. 1.70 per shares
P.E Ratio 10
Market Price Per shares (EPS x PE) 17 shares

Following Financial data are available for Platinum for the year 2011 :
Rs. in lakhs
Equity share Capital 100
8%debentures 125
10% bonds (2007) 50
Equity shares (Rs. 10 each) 100
Total Assets 500
Assets Turnovers ratio 1 .1
Dividend payout ratio 20%
Current market Price of Share 13
Required Return for ESH 15%
(iii) Calculate the fair price of the company’s share using dividend discount model, and
(iv) What is your opinion on investment in the company’s share at current price?
34 | P a g e
Solution :
Workings:
Asset turnover ratio = 1.1
Total Assets = Rs.500 lakhs
Turnover Rs.500 lakhs × 1.1 = Rs.550 lakhs
(i) Income Statement
Rs.in Lakhs
Sales (500  1.1) 550.00
Less : Operating Expenses 495.00
EBIT (10%) 55.00
Less : Interest (125  0.08 + 50  0.1) 15.00
EBT 40.00
Less : Tax (30%) 12.00
EAT 28.00
Less : Dividend (20%) 5.60
(ii) Growth Rate
G = br
NPAT 28
ROE = Net Worth = 100 + 200 x 100 = 9.33%
b = 1 – payout ratio = 1 – 0.2 = 0.8 = 80%
g = 80  9.33% = 7.464%
(iii) IV of the share using Dividend Discount Model
D1
IV = Ke ‐ g
5.6
D1 = 10 + 7.464% = 0.6018
0.6018
Iv = 0.15‐0.07464 = Rs.8 Per share
(iv) The current market price of the shares if Rs.13 and the Iv is 8, therefore the share is overpriced
in the market and hence the investor should go short.

Tiger Ltd. is presently working with an Earning before Interest and Taxes (EBIT) of Rs.90 lakhs. Its
present borrowings are as follows
Rs.in lakhs
12% term Loan 300
Working Capital Borrowings
From Bank at 15% 200
Public Deposit at 11% 100
35 | P a g e
The sales of the company are growing and to support this, the company proposes to obtain additional
borrowing of Rs.100 lakhs expected to cost 16%.The increase in EBIT is expected to be 15%.
Calculate the change in interest coverage ratio after the additional borrowing is effected and
comment on the arrangement made.
Solution :
Calculation of Present Interest Coverage Ratio
Present EBIT = Rs.90 lakh
Interest charges (present) Rs.in lakhs
Term loan @ 12% 36.00
Bank Borrowing @ 15% 30.00
Public Deposit @ 11% 11.00
77.00
EBIT
Present Interest Coverage Ratio = Inerest Charges
Rs.90 lakhs
=
Rs.77 lakhs
= 1.169
Calculation of Revised Interest Coverage Ratio

Revised EBIT (115% of Rs.90 lakh) Rs.103.50 lakh
Proposed Interest Charges
Existing Interest Charges 77.00 lakh
(+) Additional charges
(16% of Additional Borrowing i.e. 100 lakhs 16.00 lakh
Total 93.00 lakh
Rs.103.50 lakhs
Revised Interest Coverage Ratio =
Rs.93.00 lakhs
= 1.113
Change in interest coverage ratio = 1.169 – 1.113 = 0.056
Note : Decrease in interest coverage ratio is adverse for entire.

Given the following information
Current Dividend Rs.5.00
Discount Rate 10%
Growth Rate 2%
1) Calculate the present value of the stock
2) Is the stock over valued if the price is Rs.40. ROE = 8% and EPS = Rs.3.00. Show your calculation
under the PE Multiple approach and Earnings Growth Model.
36 | P a g e
Solution :
(i) Iv of the share (By Dividend Discount Model)
D1
Iv =
Ke  g
D1 = 5 + 2% = 5.1 per share
5.1
Iv = = Rs.63.75 per share
0.010 - 0.02
(ii) ROE = 8%
G = br
Where
G = Growth = 2%
b = Retention Ratio
r = ROE = 8%
2 = b x 8%, therefore b = 25%
Payout Ratio = 100 – 25 = 75%
Dividend = 3 x 75% = 2.25
D1 2.25(1.02)
New Price of share = = = Rs.28.6875
Ke  g 0.10 - 0.02
The Stock is overpriced at 40
2013
X Limited, just declared a dividend of Rs.14.00 per share. Mr. B is planning to purchase the share of
X Limited, anticipating increase in growth rate from 8% to 9%, which will continue for three years. He
also expects the market price of this share to be Rs.360.00 after three years.
You are required to determine:
(i) the maximum amount Mr. B should pay for shares, if he requires a rate of return of 13% per
annum.
(ii) the maximum price Mr. B will be willing to pay for share, if he is of the opinion that the 9%
growth can be maintained indefinitely and require 13% rate of return per annum.
(iii) the price of share at the end of three years, if 9% growth rate is achieved and assuming other
conditions remaining same as in (ii) above.
Calculate rupee amount up to two decimal points.
Year‐1 Year‐2 Year‐3
FVIF @ 9% 1.090 1.188 1.295
FVIF @ 13% 1.130 1.277 1.443
PVIF @ 13% 0.885 0.783 0.693
Solution :
(i) Stage 1
Year Dividend PV@13%
37 | P a g e
1 15.26 13.50
2 16.6334 13.03
3 18.13 12.56
39.09
Stage 2
360
IV0 = = 250
1.133
Total IV = 250 + 39.09
= 289.09
(ii) If growth rate 9% is achieved for indefinite period, then maximum price of share should Mr.
A willing be to pay is
D1 15.26
Iv = = = Rs.381.50 per share
Re  g 0.13 - 0.09
(iii) Assuming that conditions mentioned above remain same, the price expected after 3 years will
D4 18.13 1.09
be: = = Rs.494 per share
Ke  g 0.04
Question 42 Nov 2013 RTP – Similar to ‐ Question 5 ‐ May 2009 Paper – 6 Marks
Question 43 Nov 2013 – RTP – Similar to ‐ Question 6 ‐ Nov 2009 RTP

A share of Tension‐free Economy Ltd. is currently quoted at a price earnings ratio of 7.5 times. The
retained earning being 37.5% is Rs.3 per share.
Calculate
(i) The company’s cost of equity, if investors’ expected rate of return is 12%.
(ii) Market price of share, if anticipated growth rate is 13% per annum with same cost of capital.
(iii) Market price per share, if the company’s cost of capital is 18% and anticipated growth rate is
15% per annum, assuming other conditions remaining the same.
Solution :
 3 
Earnings = Rs.8 37.5%
 
P.E. ratio = 7.5
MPs = EPs  P.E. = 8  7.5
= Rs.60/share
D1
A) IV =
Re  g
38 | P a g e
5(1.12)
60 = Re ‐ 0.12  Re = 21.33%
B) If g = 13%
51.13
IV = = Rs.67.83/share
0.2133 - 0.13
C) If Re = 18%, g = 15%
5(1.15)
IV = 0.18 ‐ 0.0.15 = Rs.191.67/share
2014
A valuation done of an established company by a well‐known analyst has estimated a value of Rs.
500 lakhs, based on the expected free cash flow for next year of Rs. 20 lakhs and an expected growth
rate of 5%.
debt is equal to the book value of debt. You are required to estimate the correct value of the
company.
Solution :
FCFF1
Vo = Kc ‐ 1
20
500 = Kc ‐ 0.05
Kc = 0.09 i.e 9%
WACC = Wt debt + Wt Equity
= 12(1 – x) + 6(x) = 9
X = 0.5 ‐‐‐ these were old weights
i.e. equity and debt were 50 – 50 (book values), however equity shall be 50 x 3 = 150 and debt shall
be 50 x 1 = 50. This puts the weights to 75 : 25 (Equity/Debt)
New WACC = 12 (0.75) + 6(0.25) = 10.50%
FCFF1 20
Vo = Kc ‐ 1 = 0.105‐0.05 = Rs. 363.64
39 | P a g e
MNP Ltd. has declared and paid annual dividend of Rs. 4 per share. It is expected to grow @ 20% for
the next two years and 10% thereafter. The required rate of return of equity investors is 15%.
Compute the current price at which equity shares should sell.
Note: Present Value Interest Factor (PVIF) @ 15%:
For year 1 = 0.8696;
For year 2 = 0.7561
Solution :
Stage 1 : Explicit Stage
Year Dividend PV of Dividend (15%
1 4.80 4.17408
2 5.76 4.355136
Total 8.529216
Stage 2 : Horizon Stage
D3 5.76 + 10%
IV2 = = 0.15 ‐ 0.1 = 126.72
Re  g
IV0 = 126.72 x 0.7561 = 95.812992
Total IV = Stage 1 + Stage 2 = 8.529216 + 95.812992 = Rs.104.342208

Following information is given in respect of WXY Ltd., which is expected to grow at a rate of 20% p.a.
for the next three years, after which the growth rate will stabilize at 8% p.a. normal level, in
perpetuity.
For the year ended March 31, 2014
Revenues Rs. 7,500 Crores
Cost of Goods Sold (COGS) Rs. 3,000 Crores
Operating Expenses Rs. 2,250 Crores
Capital Expenditure Rs. 750 Crores
Depreciation (included in COGS Rs. 600 Crores
& Operating Expenses)
During high growth period, revenues & Earnings before Interest & Tax (EBIT) will grow at 20% p.a.
and capital expenditure net of depreciation will grow at 15% p.a. From year 4 onwards, i.e. normal
growth period revenues and EBIT will grow at 8% p.a. and incremental capital expenditure will be
offset by the depreciation. During both high growth & normal growth period, net working capital
requirement will be 25% of revenues.
The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%.
Corporate Income Tax rate will be 30%.
Required: Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) & WACC methodology.
The PVIF @ 15 % for the three years are as below:
Year T1 T2 T3
PVIF 0.8696 0.7561 0.6575
40 | P a g e
Solution :
Working Note 1 :
FCFF = NOPAT – NI
(i) NOPAT = EBIT (I – t)
Year 1 Year 2 Year 3 Year 4
Revenue 9000.00 10800.00 12960.00 13996.80
Less : COGS 3600.00 4320.00 5184.00 5598.72
Less : Operating Expenses 1980.00 2376.00 2851.20 3079.30
Less : Depreciation 720.00 864.00 1036.80 1119.74
EBIT 2700.00 3240.00 3888.00 4199.04
Less : Tax (30%) 810.00 972.00 1166.40 1259.71
NOPAT 1890.00 2268.00 2721.60 2939.33
(ii) Net Investment = Capital Spending – Depreciation + Change in Working Capital
Base Year 1 Year 2 Year 3 Year 4

Capital Spending – Dep 172.50 198.38 228.13 –
Rev. 7500 9000 10800 12960 13996.80
Working Capital 1875 2250 2700 3240 3499.2
∆ Working Capital 375 450 540 259.2
(iii) FCFF
NOPAT – NI 1342.50 1619.62 1953.47 2680.13
Stage 1 : Explicit
Year FCFF PV @ 15%
1 1342.50 1167.44
2 1619.62 1224.59
3 1953.47 1284.41
Total 3676.44
Stage 2 : Horizon Stage
FCFF4 .
V3 = = = 38287.57
Kc  g . .
.
V0 = = Rs. 25174.08 Crore
.
Total Value of Firm
= Stage 1 + Stage 2 = 3676.44 + 25,174.70 = Rs. 28,851.14 Crores
41 | P a g e
RST Ltd.’s current financial year's income statement reported its net income as Rs. 25,00,000. The
applicable corporate income tax rate is 30%.
Following is the capital structure of RST Ltd. at the end of current financial year:
Rs.
Debt (Coupon rate = 11%) 40 lakhs
Equity (Share Capital + Reserves & Surplus) 125 lakhs
Invested Capital 165 lakhs
Following data is given to estimate cost of equity capital:
Rs.
Beta of RST Ltd. 1.36
Risk –free rate i.e. current yield on Govt. bonds 8.5%
Average market risk premium (i.e. Excess of return on
market portfolio over risk‐free rate) 9%
Required:
(i) Estimate Weighted Average Cost of Capital (WACC) of RST Ltd.; and
(ii) Estimate Economic Value Added (EVA) of RST Ltd
Solution :
(i) WACC
Cost of Equity as per CAPM
ke = Rf + x (RM – Rf) ‐ Market Risk Premium
= 8.5% + 1.36 x 9%
= 8.5% + 12.24%
= 20.74%
Cost of Debt
kd = 11%(1 – 0.30) = 7.70%
125 40
WACC = Wt Ke + Wt Kd = 20.74 x 165 + 7.70 x 165 = 17.58%
(ii) Economic Value Added
Net Profit After Tax = 25,00,000
Add : Tax (30%)
Net Profit Before Tax = 35,71,429
Add Interest = 4,40,000
EBIT = 40,11,429
EVA = Nopat – Kc (Amount
Nopat = EBIT (1 – t) = 40,11,429 (1‐0.3) = 28,08,000
Kc (Amount) = 125,00,000 + 40,00,000) x 17.58% = 29,00,700
EVA = 28,08,000 – 29,00,700 = ‐ 92,700
Question 49 Nov 2014 ‐ RTP – Similar to ‐ Question 42 ‐ Nov 2013 RTP
42 | P a g e
Question 50 Nov 2014 – RTP ‐ – Similar to ‐ Question 45 ‐ May 2014 – RTP

The valuation of Hansel Limited has been done by an investment analyst. Based on an expected free
cash flow of Rs.54 lakhs for the following year and an expected growth rate of 9 percent, the analyst
has estimated the value of Hansel Limited to be Rs.1800 lakhs. However, he committed a mistake of
using the book values of debt and equity.
The book value weights employed by the analyst are not known, but you know that Hansel Limited
has a cost of equity of 20 percent and post tax cost of debt of 10 percent.
The value of equity is thrice its book value, whereas the market value of its debt is nineteenths of its
book value. What is the correct value of Hansel Ltd?
Solution :
FCFF1
VO = Kc ‐ 1
1800 =
.
Kc = 0.12 i.e 12%
WACC = Wt Equity + Wt Debt
= 20(1 – x) + 10(x) = 12
X = 0.8 – Weight of Debt
Weight of Equity = 1 – 0.8 = 0.2
i.e equity and debt were 20 and 80 respectively (book values),
however equity shall be 20 x 3 = 60
and debt shall be 80 x 9/10 = 72
Total = 132
New WACC = 20 (60/132) + 10(72/132) = 14.5455%
FCFF1
VO = Kc ‐ g = = Rs.973.76 lakhs.
. .
Question 52 Nov 2014 – Paper (8 Marks)

The risk free rate of return Rf is 9 percent. The expected rate of return on the market portfolio Rm
is 13 percent. The expected rate of growth for the dividend of Platinum Ltd. is 7 percent. The last
dividend paid on the equity stock of firm A was Rs.2.00. The beta of Platinum Ltd. equity stock is 1.2.
(i) What is the equilibrium price of the equity stock of Platinum Ltd.?
(ii) How would the equilibrium price change when
• The inflation premium increases by 2 percent?
• The expected growth rate increases by 3 percent?
• The beta of Platinum Ltd. equity rises to 1.3?
Solution :
43 | P a g e
(i) Equilibrium price of Equity using CAPM

= 9% + 1.2(13% ‐ 9%)
= 9% + 4.8%= 13.8%
D1 2 + 7%
VO = = 0.138 ‐ 0.07 = Rs.31.47
Re  g
(ii) New Equilibrium price of Equity using CAPM
Re = 9.18% + 1.3(13% ‐ 9.18%)
= 9.18% + 4.966%= 14.146%
–Rf = 9(1.02) = 9.18
g = 7 + 3 = 10%
D1 2 + 10%
VO = = 0.14146 ‐ 0.10 = Rs.53.06
Re  g

An investor is holding 5,000 shares of X Ltd. Current year dividend rate is Rs.3/share. Market price of
the share is Rs.40 each. The investor is concerned about several factors which are likely to change
during the next financial year as indicated below:
Current Year Next Year
Dividend paid/anticipated per share (Rs.) 3 2.5
Market Risk Premium 5% 4%
Beta Value 1.3 1.4
Expected growth 9% 7%
In view of the above, advise whether the investor should buy, hold or sell the shares.
Solution :
CY NY
(i) Re = Rf + (Rm – Rf) 12 + 1.3(5) 10 + 1.4 (4)
= 18.5 = 15.6
D1 3(1.09) 2.5(1.07)
(ii) IV = = =
Re  g 0.185 - 0.09 0.156 - 0.07
= Rs.34.42/sh = Rs.31.10/sh
2015
Question 54 May 2015 – RTP
ABC Ltd. has divisions A,B & C. The division C has recently reported on annual operating profit of
Rs.20,20,00,000. This figure arrived at after charging Rs.3 crores full cost of advertisement
expenditure for launching a new product. The benefits of this expenditure is expected to be lasted
for 3 years.
The cost of capital of division C is 11% and cost of debt is 8%.
44 | P a g e
The Net Assets (Invested Capital) of Division C as per latest Balance Sheet is Rs.60 crore, but
replacement cost of these assets is estimated at Rs. 84 crore.
You are required to compute EVA of the Division C.
Solution :
First necessary adjustment of the data as reported by historical accounting system shall be made as
follows:
Rs.
Operating Profit 20,20,00,000
Add: Cost of unutilized Advertisement Expenditures 2,00,00,000
22,20,00,000
Invested Capital (as per replacement cost) is Rs. 84 crore.
Accordingly, EVA = Operating Profit – (Invested Capital x Cost of Capital)
= Rs. 22,20,00,000 – Rs. 84 crore x 11%
= Rs. 22.2 crore – Rs. 9.24 crore
= Rs. 12.96 crore

The total market value of the equity share of O.R.E. Company is Rs.60,00,000 and the total value of
the debt is Rs.40,00,000. The treasurer estimate that the beta of the stock is currently 1.5 and that
the expected risk premium on the market is 10 per cent. The Treasury bill rate is 8 per cent.
Required:
(1) What is the beta of the Company’s existing portfolio of assets?
(2) Estimate the Company’s Cost of capital and the discount rate for an expansion of the
company’s present business.
Solution :
β Assets = Wt β Equity + wt β Debt
Equity = 60,00,000
Debt = 40,00,000
Total = 1,00,00,000
2) Cost of Capital
= 8 + 0.09(10) = 179
45 | P a g e
Two companies A Ltd. and B Ltd. paid a dividend of Rs. 3.50 per share. Both are anticipating that
dividend shall grow @ 8%. The beta of A Ltd. and B Ltd. are 0.95 and 1.42 respectively.
The yield on GOI Bond is 7% and it is expected that stock market index shall increase at annual rate
of 13%. You are required to determine:
(a) Value of share of both companies.
(b) Why there is a difference in the value of shares of two companies.
(c) If current market price of share of A Ltd. and B Ltd. are Rs. 74 and Rs. 55 respectively. As an
investor what course of action should be followed?
Solution :
(a) First of all we shall compute Cost of Capital (Ke) of these companies using CAPM as follows:
Ke (A) = 7.00% + (13% ‐7%)0.95
= 7.00% + 5.70% = 12.7%
Ke (B) = 7.00% + (13% ‐7%)1.42
= 7.00% + 8.52% = 15.52%
(b) Value of shares
D1 3.5 + 8%
Va = Re ‐ g = 0.127 ‐ 0.08 = Rs. 80.43
D1 3.5 + 8%
Vb = Re ‐ g = 0.1552 ‐ 0.08 = Rs. 50.27
(c) The valuation of share of B Ltd. is lower because systematic risk is higher though both have
same growth rate.
(d) If the price of share of A Ltd. is Rs.74, the share is undervalued and it should be bought. If
price of share of B Ltd. is Rs.55, it is overvalued and should not be bought.
Question 58 Nov 2015 – RTP ‐ Similar to ‐ Question 17 ‐ Nov 2010 ‐ Paper – 8 Marks
Question 59 Nov 2015 – Paper

X Ltd is a shoe manufacturing company. It is all equity financed and has a paid up capital of Rs.
10,00,000 @ 10 per share)
X Ltd. has hired swastika consultants to analyse the future earnings. The report of swastika
consultants states as follows :
(i) The earnings and dividend will grow at 25% for next two years
(ii) Earnings are likely to grow at the rate of 10% from 3rd year and onwards
(iii) Further, if there is reduction in earnings growth, dividend payout ratio will increase to 50%
The other data related to the company are as follows
Year EPS (Rs.) Dividend Per share (Rs.) Share Price (Rs.)
2010 6.30 2.52 63.00

2011 7.00 2.80 46.00
46 | P a g e
2012 7.70 3.08 63.75

2013 8.40 3.36 68.75
2014 9.60 3.84 93.00
You may assume that the tax rate is 30% (not expected to change in future) and post tax cost of
capital is 15%
By using the Dividend Valuation Model, Calculate
(i) Expected Market Price per share
(ii) P.E. Ratio
Solution :
(a) The formula for the Dividend valuation Model is
D1
Iv = Ke ‐ g
g = Growth rate
D1 = Dividend at the end of year 1
Stage 1 : Explicit Stage
On the basis of the information given, the following projection can be made:
Year EPS (Rs.) DPS (Rs.) PV of DPS @15%
2015 12.00 4.80 4.176
(9.60 x 125%) (3.84 x 125%)
2016 15.00 6.00 4.536
(12.00 x 125%) (4.80 x 125%)
2017 16.50 8.25* 5.429
(15.00 x 110%) (50% of Rs. 16.50)
14.141
*Payout Ratio changed to 50%.
Stage 2 : Horizon
After 2017, the perpetuity value assuming 10% constant annual growth is:
D4 = Rs. 8.25 × 110% = Rs. 9.075
D4 9.075
IV3 = Ke ‐ g = 0.15 ‐ 0.10 = 181.50
181.50
Iv0 = (1.15)3 = 119.43
Total IV = Stage 1 + Stage 2 = 14.141 + 119.43 = 133.57
2016
Following Financial data are available for PQR Ltd. for the year 2008:
(Rs. in lakh)
8% Debentures 125
47 | P a g e
10% Bonds 50
Equity Shares (Rs.10 each) 100
Total Assets 600
Assets Turnover ratio 1:1
Effective interest rate 8%
Dividend payout ratio 16.67%
Current market Price of Share Rs.14
Required rate of return of investors 15%
(iii) Calculate the fair price of the Company's share using dividend discount model, and
(iv) What is your opinion on investment in the company's share at current price?
Solution :
(i) Income Statement
(Rs. in lakh)
Sale (600  1.1) 660
Operating Expense 594
EBIT (10%) 66
Interest (125 + 50)  8% 14
EBT 52
Tax @ 40% 20.80
EAT 31.20
Dividend @ 16.67% 5.20
(ii) G = br
ROE = and NW = Rs.100 lakhs + Rs.300 lakhs
= 400Lakhs
.
ROE = × 100 = 7.8%
Retention Ratio = 100 – 16.67 = 83.33
G = 83.33  7.8% = 6.5%
(iii) Calculation of fair price of share using dividend discount model
P =
48 | P a g e
.
Dividends = = Rs.0.52
Growth Rate = 6.5%
. . . . .
Hence P = = = Rs.6.51
. . .
(iv) Since the current market price of share is Rs.14, the share is overvalued. Hence the investor
should not invest in the company.
Question 61 May 2016 – Paper

Calculate the value of share of Avenger Ltd. from the following information:
Equity capital of Company Rs.1,200 crores
Profit of the company Rs.300 crore
Par value of share Rs.40 each
Debt ratio of company 25
Change in working capital per share Rs.4
Depreciation per share Rs.40
Capital expenditure per share Rs.48
Solution :
.
No. of shares = = 30 crore
.
EPS =
.
.
EPS = = Rs.10.00
NI = [Cap. Spending – Dep.) + WC] (1 – Debt.)

= [(48 – 40) + 4] (1 – 0.25) = 9
= PAT – NU
= 10 – 9
= 1.00
Cost of Equity = R + β(R R)
= 8.7 + 0.1(10.3 – 8.7)
= 8.86%
. . .
P = = = = Rs.125.58
. . .
49 | P a g e
XYZ Ltd. paid a dividend of 2 for the current year. The dividend is expected to grow at 40% for the
next 5 years and at 15% per annum thereafter. The return on 182 days T‐bills is 11% per annum and
the market return is expected to be around 18% with a variance of 24%.
The co‐variance of XYZ's return with that of the market is 30%. You are required to calculate the
required rate of return and intrinsic value of the stock.
Solution :
β =
%
β = = 1.25
%
Expected return = R + β(R R)
= 11% + 1.25(18% ‐ 11%)
= 11% + 8.75%
= 19.75%
Intrinsic Value
Year Dividend (Rs.) Present Value (Rs.)
1 2.80 2.34
2 3.92 2.73
3 5.49 3.19
4 7.68 3.73
5 10.76 4.37
16.36
. .
IV5 = = Rs.260.51
. .
260.51
IV0 = = 105.79
1.19755
Intrinsic Value = Rs.16.36 + Rs.105.79
= Rs.122.15

Abinash is holding 5,000 shares of Future Group Limited. Presently the rate of dividend being paid by
the company is Rs.5 per share and the share is being sold at Rs.50 per share in the market. However,
several factors are likely to change during the course of the year as indicated below:
Existing Revised
Risk free rate 12.5% 10%
Market risk premium 6% 4.8%
Expected growth rate 5% 8%
Beta value 1.5 1.25
In view of the above factors whether Abinash should buy, hold or sell the shares? Narrate the reason
for the decision to be taken.
50 | P a g e
Solution :
Cost of Equity as per CAPM
= R + β(R R)
Exiting rate of return 12.5% + 1.5 x 6% = 21.5%

Revised rate of return 10.0% + 1.25 x 4.80% = 16.00%
Price of share (Original)
P = or
. .
= = = Rs.31.82
. . .
P0 Price of share (Revised)
. .
= = = Rs.67.50
. . .

Kanpur Shoe Ltd. is having sluggish sales during the last few years resulting in drastic fall in market
share and profit. The marketing consultant has drawn out a new marketing strategy that will be valid
for next four years. If the new strategy is adopted, it is expected that sales will grow @ 20% per year
over the previous year for the coming two years and @ 30% from the third year. Other parameters
like gross profit margin, asset turnover ratio, the capital structure and the rate of Income tax @ 30%
will remain unchanged. Depreciation would be 10% of the net fixed assets at the beginning of the
year. The targeted return of the company is 15%.
The financials of the company for the just concluded financial year 2015‐16 are given below:
Income Statement Amount (Rs.)
Turnover 2,00,000
Gross margin (20%) 40,000
Admin, Selling & Distribution expense (10%) 20,000
PBT 20,000
Tax (30%) 6,000
PAT 14,000
Balance Sheet Information

Fixed Assets 80,000
Equity Share Capital 1,20,000
You are required to assess the incremental value that will accrue subsequent to the adoption of the
new marketing strategy and advise the Board accordingly.
PV @ 15% for 1, 2 & 3 years are: 0.870, 0.756, 0.658 respectively.
51 | P a g e
Solution :
1) Value of firm before strategy
PAT(FCFE) 14000
Vf = = = 93,333.33
Re 0.15
2) Value of firm after strategy
A) Stage 1
Year 1 2 3 4
FCFE 16800 20160 26208 34070.4
PAT (14000 + 20%) (20160 + 30%)
‐ NI 24000 28800 51840 67392
(120000  1.2) (120000  1.2  (51840  1.3)
1.2  1.3 –
172800)
FCFE (7200) (8640) (25632) (33,321.6)
PV @ 15% (6260.87) (6533.08) (16853.46) (19051.73)
Total = (48,699.14)
B) Stage 2
FCFE 5 (PAT) 34070.4
Vf4 = = = 227136
Re 0.15
227136
Vf0 = = 129865.75
(1.15) 4
Total= 129865.75 – 48699.14 = 81,166.61
= Value of firm after strategy = 81166.61
= Value of firm before strategy = 93333.33
–12166.72
Note : Since value of strategy is negative it should not be implemented.

XN Ltd. reported a profit of Rs.100.32 lakhs after 34% tax for the financial Year 2015‐ 2016. An analysis
of the accounts reveals that the income included extraordinary items of Rs.14 lakhs and an
extraordinary loss of Rs.5 lakhs. The existing operations, except for the extraordinary items, are
expected to continue in future. Further, a new product is launched and the expectations are as under:
Particulars Amount Rs. in lakhs
Sales 70
Material Costs 20
Labour Costs 16
Fixed Costs 10
The company has 50,00,000 Equity Shares of ` 10 each and 80,000, 9% Preference Shares of Rs.100
each with P/E Ratio being 6 times.
52 | P a g e

(i) Compute the value of the business. Assume cost of capital to be 12% (after tax) and
(ii) Determine the market price per equity share.
Solution :
i. Computation of Business Value
(Rs.in lakhs)
. 152
Profit before tax
.
Less: Extraordinary income (14)
Add: Extraordinary losses 5
143
Profit from new product
Sales 70
Less: Material costs 20
Labour cost 16
Fixed costs 10 (46) 24
167.00
Less: Taxes @34% 58.78
Future Maintainable profits after taxes 110.22
Relevant Capitalization Factor 0.12
Value of Business (Rs.110.22/22) 918.50
ii. Determination of Market Price of Equity Share

Future maintainable profits (After tax) 1,10,22,000
Less: Preference share dividends 80,000 shares of 7,20,000
Rs.100 @ 9%
Earnings available for Equity Shareholders 1,03,02,000
No. of Equity Shares 50,00,000
, , , 2.06
Earnings per share =
, ,
.
6
PE Ratio
Market price per share 12.36
2017
ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They want to know
the value of the new strategy. Following information relating to the year which has just ended, is
available:
Income Statement Rs.
Sales 20,000
53 | P a g e
Gross Margin (200%) 4,000

Administration, Selling & Distribution expenses (10%) 2,000
PBT 2,000
Tax (30%) 6000
PAT 1,400
Fixed Assets 8,000
Equity 12,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The gross
margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will remain
unchanged.
Depreciation would be at 10% of net fixed a ssets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
Solutions :
1) Value of firm before the strategy
FCFE(PAT) 1400
Vf = = = 9333.33
Re 15%
2) Value of firm after strategy
a) Stage 1
Year 1 2 3 4
FCFE 16800 20160 26208 34070.4
PAT (14000 + 20%) (20160 + 30%)
‐ NI 24000 28800 51840 67392
(120000  20%) (2400 + 20%)
(720) (864) (1036.8) (1244.16)
PV @ 15% (626.09) (653.31) (681.71) (711.35)
Total = (2672.46)
b) Stage 2
FCFE(PAT) 5 2903.04
IV4 = = = 19353.6
Re 0.15
19353.6
IV0 = = 11065.48
1.154
Total IV = 11065.48 – 2672.46 = 8393.02
= Value of firm after strategy = 8393.02
= Value of firm before strategy = 9333.33
–940.31
Note : Since he value of strategy is negative the firm should not go ahead with strategy.
54 | P a g e

Closing values of BSE Sensex from 6th to 17th day of the month of January of the year 200X were as
follows:
Days Date Day Sensex
1 6 THU 14522
2 7 FRI 15925
3 8 SAT No Trading
4 9 SUN No Trading
5 10 MON 15222
6 11 TUE 16000
7 12 WED 16400
8 13 THU 17000
9 14 FRI No Trading
10 15 SAT No Trading
11 16 SUN No Trading
12 17 MON 18000
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30 days simple
moving average of Sensex can be assumed as 15,000. The value of exponent for 30 days EMA is 0.062.
Give detailed analysis on the basis of your calculations.
Solutions :
Date 1 2 EMA for 3 4 5
Sensex Previous day 1‐2 3 x 0.062 EMA
2+4
6 14522 15000 (478) (29.636) 14970.364
7 14925 14970.364 (45.364) (2.812) 14967.55
10 15222 14967.55 254.45 15.776 14983.32
11 16000 14983.32 1016.68 63.034 15046.354
12 16400 15046.354 1353.646 83.926 15130.28
13 17000 15130.28 1869.72 115.922 15246.202
17 18000 15246.202 2753.798 170.735 15416.937
Conclusion ‐ The market is bullish. The market is likely to remain bullish for short term to medium
term if other factors remain the same. On the basis of this indicator (EMA) the investors/brokers can
take long position.

Sunrise Limited last year paid dividend of Rs.20 per share with an annual growth rate of 9%. The risk‐
free rate is 11% and the market rate of return is 15%. The company has a beta factor of 1.50.
55 | P a g e
However, due to the decision of the Board of Director to grow inorganically in the recent past beta is
likely to increase to 1.75.
You are required to find out under Capital Asset Pricing Model
(i) The present value of the share
(ii) The likely value of the share after the decision.
Solution :
The value of Cost of Equity with the help of CAPM
K = R + β(R ‐ R )
With the given data the Cost of Equity using CAPM will be:
K = 0.11 + 1.5(0.15 – 0.11)
K = 0.11 + 1.5(0.04)
= 0.17 or 17%
The value of share using the Growth Model:
P =
.
P =
. .
.
P = = Rs.272.50
.
However, if the decision of the Board of Directors is implemented, the beta factor is likely to
increase to 1.75.
Therefore,
K = 0.11 + 1.75(0.15 – 0.11)
K = 0.11 + 1.75(0.04)
= 18%
The value of share using the Growth Model:
P =
.
P =
. .
.
P = = Rs.242.22
.

Given below is the Balance Sheet of S Ltd. as on 31.3.2008:
Liabilities Rs. (in lakhs) Assets Rs. (in lakhs)
Share capital 100 Land and building 40
(share of Rs.10)
56 | P a g e
Reserves and surplus 40 Plant and machinery 80

Long Term Debts 30 Investments 10
Stock 20
Debtors 15
Cash at bank 5
Total 170 Total 170
You are required to work out the value of the Company's, shares on the basis of Net Assets method
and Profit‐earning capacity (capitalization) method and arrive at the fair price of the shares, by
considering the following information:
(i) Profit for the current year Rs.64 lakhs includes Rs.4 lakhs extraordinary income and Rs.1 lakh
income from investments of surplus funds; such surplus funds are unlikely to recur.
(ii) In subsequent years, additional advertisement expenses of Rs.5 lakhs are expected to be
incurred each year.
(iii) Market value of Land and Building and Plant and Machinery have been ascertained at Rs.96
lakhs and Rs.100 lakhs respectively. This will entail additional depreciation of Rs.6 lakhs each
year.
(iv) Effective Income‐tax rate is 30%.
(v) The capitalization rate applicable to similar businesses is 15%.
Solution :
Rs.in Lakhs
Net Assets Method
Assets: Land & Buildings 96
Plant & Machinery 100
Investments 10
Stocks 20
Debtors 15
Cash & Bank 5
Total Assets 246
Less: Long Term Debts 30
Net Assets 216
Value per share
, , ,
(i) Number of shares = 10,00,000
(ii) Net Assets Rs.2,16,00,000
. , , ,
= Rs.21.6
, ,
Profit – Earning Capacity Method Rs.in lakhs
57 | P a g e
Profit before tax 64.00

Less : Extraordinary income 4.00
Investment income (not likely to recur) 1.00 5.00
59.00
Less : Additional expenses in forthcoming years
Advertisement 5.00
Depreciation 6.00 11.00
Expected earnings before taxes 48.00
Less: Income ‐ tax @ 30% 14.40
Future maintainable profits (after taxes) 33.60
Value of business
.
Capitalisation factor = = 224
.
Less : Long Term Debts 30
194
Value per share

, , ,
= Rs.19.40
, ,
Fair Price of share Rs.

Value as per Net Assets Method 21.60
Value as per Profit earning capacity (Capitalisation) method 19.40
. . .
Fair Price = = = Rs.20.50

The Following is the Balance Sheet of XYZ Ltd. as at 31st March, 2016:
Liabilities Rs.in lakhs Assets Rs.in lakhs
Equity Shares of Rs.10 each 500 Land and Buildings 150
11% Preference Shares of Rs.10 100 Plant and Machinery 200
each
12% Debentures 100 Furniture and Fixtures 60
Debenture Interest Accrued and 12 Inventory 60
Payable
Loan from Bank 60 Sundry debtors 50
Trade Creditors 300 Cash at bank 50
Preliminary expense 15
Cost of issue of 7
debentures
58 | P a g e
Profit and loss account 480

Total 1,072 Total 1,072
The Company's performance is not good and has suffered sizable losses during the last few years.
The Company can be nursed back to health with proper financial restructuring.
As such, the following scheme is prepared:
i. Equity Shares are to be reduced to 2 per Share, fully paid‐up.
ii. Preference Shares are to be reduced (with coupon Rate of 9%) to equal number of Shares of
Rs.5 each, fully paid‐up.
iii. Debenture holders have agreed to forgo the accrued interest due to them and for the future
the rate of interest on Debentures to be 10%.
iv. Trade Creditors will forgo 20% of the amount due to them.
v. The Company to issue 50 Lakh Shares at Rs.2 each to be paid fully on Application.
vi. The entire amount is fully subscribed by Promoters.
vii. Land and Building to be revalued at Rs.350 Lakhs, Plant and Machinery value to be taken at
Rs.150 Lakhs and a provision of Rs.5 Lakhs to be made for Bad and Doubtful Debts.
1) Show the impact of Financial Restructuring on the Company's activities.
2) Prepare the fresh Balance Sheet after the reconstruction is completed on the basis of above
proposals.
Solution :
Impact of Financial Restructuring
i. Benefits of Grape XYZ Ltd.
Rs.in lakhs
(a) Reduction of liabilities payable
Reduction in equity share capital 400
(50 lakh shares x Rs.8 per share)
Reduction in preference share capital 50
(10 lakh shares x Rs.5 per share)
Waiver of outstanding debenture interest 12
Waiver from trade creditors (Rs.300 lakhs x 0.20) 60
522
(b) Revaluation of Assets
Appreciation of Land & Building (350 ‐ 150) 200
Total (A) 722
ii. Amount of Rs.722 lakhs utilized to write off losses, fictitious assets and over‐valued assets.
Rs.in lakhs
59 | P a g e
Writing off profit and loss account 480

Cost of issue of debentures 7
Preliminary expenses 15
Provision for bad and doubtful debts 5
Revaluation of Plant and Machinery (200 ‐ 150) 50
Total (B) 557
Capital Reserve (A) – (B) 165
iii. Balance Sheet of XYZ ltd. as at 31st March 2016 (after re‐construction)
Liabilities Rs.in lakhs Assets Rs.in lakhs
100 lakhs equity shares of Rs.2 200 Land and Buildings 350
each
9% Preference Shares of Rs.5 50 Plant and Machinery 150
each
Capital Reserve 165 Furniture and Fixtures 60
10% Debenture 100 Inventory 60
Loan from Bank 60 Sundry debtors 50
Less: Provision for
Doubtful Debt (5) 45
Trade Creditors 240 Cash at bank 150
(300 ‐ 60) (Balancing figure)*
Total 815 Total 815
Balance Sheet Total
*Opening Balance of Rs.50/‐ Lakhs + Sale proceeds from issue of new equity shares Rs.100/‐ lakhs.

T Ltd. Recently made a profit of Rs.50 crore and paid out Rs.40 crore (slightly higher than the average
paid in the industry to which it pertains). The average PE ratio of this industry is 9. As per Balance
Sheet of T Ltd., the shareholder’s fund is Rs.225 crore and number of shares is 10 crore. In case
company is liquidated, building would fetch Rs.100 crore more than book value and stock would
realize Rs.25 crore less.
The other data for the industry is as follows:
Projected Dividend Growth 4%
Risk Free Rate of Return 6%
Market Rate of Return 11%
Average Dividend Yield 6%
The estimated beta of T Ltd. is 1.2. You are required to calculate valuation of T Ltd. using
(i) P/E Ratio
(ii) Dividend Yield
(iii) Valuation as per:
a) Dividend Growth Model
60 | P a g e
b) Book Value
c) Net Realizable Value
Solution :
(i) Rs.50 crore x 9 = Rs.450 crore
.
(ii) Rs.50 crore x = Rs.666.70
.
= 0.060.80
(iii) (a) Ke = 6% + 1.2 (11% ‐ 6%) = 12%
.
Value of firm = = Rs.520 crore
. .
(b) Rs.225 crore
(c) Rs.225 crore + Rs.100 crore – Rs.25 crore = 300 crore

Sea Rock Ltd. has an excess cash of Rs.30,00,000 which it wants to invest in short‐term marketable
securities.
(i) Expenses resulting to investment will be Rs.45,000. The securities invested will have an annual
yield of 10%. The company seeks your advice as to the period of investment so as to earn a
pre‐tax income of 6%.
(ii) Also find the minimum period for the company to break‐even its investment expenditure.
Ignore time value of money
Solution :
(i) Pre‐tax Income required on investment of Rs.30,00,000 is Rs.1,80,000.
Let the period of Investment be ‘P’ and return required on investment Rs.1,80,000
(Rs.30,00,000 x 6%)
Accordingly,
(Rs.30,00,000 x x ) – Rs.45,000 = Rs.1,80,000 10010 12P
P = 9 months
(ii) Break‐Even its investment expenditure

(Rs.30,00,000 x x ) – Rs.45,000 = 0
P = 1.80 months
2018
SAM Ltd. has just paid a dividend of Rs.2 per share and it is expected to grow @ 6% p.a. After paying
dividend, the Board declared to take up a project by retaining the next three annual dividends. It is
expected that this project is of same risk as the existing projects. The results of this project will start
coming from the 4th year onward from now. The dividends will then be Rs.2.50 per share and will
grow @ 7% p.a.
61 | P a g e
An investor has 1,000 shares in SAM Ltd. and wants a receipt of at least Rs.2,000 p.a. from this
investment.
Show that the market value of the share is affected by the decision of the Board. Also show as to how
the investor can maintain his target receipt from the investment for first 3 years and improved
income thereafter, given that the cost of capital of the firm is 8%.
Solution :
Value of share at present =
.
= = Rs.106
. .
However, if the Board implement its decision, no dividend would be payable for 3 years and the
dividend for year 4 would be Rs.2.50 and growing at 7% p.a. The price of the share, in this case, now
would be:
.
P = × = Rs.198.46
. . .
So, the price of the share is expected to increase from Rs.106 to Rs.198.45 after the announcement
of the project. The investor can take up this situation as follows:
Expected market price after 3 years . Rs.250.00
=
. .

×
. . .

x
. . .
In order to maintain his receipt at Rs.2,000 for first 3 year, he would sell
10 shares in 1st year @ Rs.214.33 for Rs.2,143.30
st
9 shares in 1 year @ Rs.231.48 for Rs.2,083.32
st
8 shares in 1 year @ Rs.250 for Rs.2,000.00
At the end of 3rd year, he would be having 973 shares valued @ Rs.250 each i.e. Rs.2,43,250. On
these 973 shares, his dividend income for year 4 would be @ Rs.2.50 i.e. Rs.2,432.50.
So, if the project is taken up by the company, the investor would be able to maintain his receipt of at
least Rs. 2,000 for first three years and would be getting increased income thereafter.
Question 74 May 2018 (New) – RTP

BRS Inc deals in computer and IT hardware and peripherals. The expected revenue for the next 8
years is as follows:
Years Sales Revenue ($ Million)
62 | P a g e
1 8
2 10
3 15
4 22
5 30
6 26
7 23
8 20
Summarized financial position as on 31st March 2012 was as follows:

Equity Stocks 12 Fixed Assets (Net) 17
12% Bonds 8 Current Assets 3
20 20
Additional Information:
(a) Its variable expenses is 40% of sales revenue and fixed operating expenses (cash) are
estimated to be as follows:
1 – 4 Years 1.6
5 – 8 Years 2
(b) An additional advertisement and sales promotion campaign shall be launched requiring
expenditure as per following details:
1 Year 0.50
2 – 3 Years 1.50
4 – 6 Years 3.00
7 – 8 Years 1.00
(c) Fixed assets are subject to depreciation at 15% as per WDV method.
(d) The company has planned additional capital expenditures (in the beginning of each year) for
the coming 8 years as follows:
1 0.50
2 0.80
3 2.00
4 2.50
5 3.50
6 2.50
7 1.50
8 1.00
(e) Investment in Working Capital is estimated to be 20% of Revenue.
63 | P a g e
(f) Applicable tax rate for the company is 30%.

(g) Cost of Equity is estimated to be 16%.
(h) The Free Cash Flow of the firm is expected to grow at 5% per annum after 8 years.
CALCULATE:
(i) Value of Firm
(ii) Value of Equity
Solution :
1) Working note for depreciation
Year 1 2 3 4 5 6 7 8
Assets Op. 17 14.875 13.15375 12.881 13.074 14.088 14.1 13.26
+ Cap.sp. 0.5 0.6 2 2.5 3.5 2.5 1.5 1
Assets 17.5 15.475 15.15375 15.381 16.57 16.588 15.6 14.26
‐ Dep. 2.625 2.32125 2.273 2.3071 2.486 2.488 2.34 2.139
Assets Clo. 14.875 13.15375 12.881 13.074 14.088 14.1 13.26 12.121
2) Kc = 16%
Kd = i(1 – t)
= 12(1 – 0.3)
= 8.4%
12 8
WACC = 20  16% + 20  8.4%
= 12.96%
3) Calculation for NOPAT

Year 1 2 3 4 5 6 7 8
Sales 8 10 15 22 30 26 23 20
VC 3.2 4 6 8.8 12 10.4 9.2 8
FC 1.6 1.6 1.6 1.6 2 2 2 2
Adv. 0.5 1.5 1.5 3 3 3 1 1
Dep. 2.625 2.32125 2.2730 2.3071 2.4860 2.488 2.34 2.139
EBIT 0.075 0.58 3.627 6.2929 10.514 8.112 8.46 6.861
tax (30%)
NOPAT 0.0525 0.411 2.538 4.405 7.359 5.678 5.922 4.8027
4) Calculation for Net Investments

Year 1 2 3 4 5 6 7 8
Cap. Sp. 0.5 0.6 2 2.5 3.5 2.5 1.5 1
‐Dep. 2.625 2.32125 2.273 2.3071 2.4860 2.488 2.34 2.139
(2.125) (1.72125) (0.2730) 0.1929 1.012 0.01 (0.84) (1.139)
64 | P a g e
+WC 1.6 2 3 4.4 6 5.2 4.6 4

NI (0.525) 0.27875 (2.727) (4.5929) 7.014 5.212 3.76 2.861
5) FCFF
Year 1 2 3 4 5 6 7 8
(NOPAT – 0.5775 0.13225 (0.189) (0.1879) 0.345 0.466 2.162 1.9417
NI)
PV @ 0.511 0.1036 (0.131) (0.115) 0.188 0.224 0.921 0.732
12.96%
FCFF9
6) V8 = Kc ‐ g
1.9417(1.05)
=
0.1296  0.05
= 25.612
25.612
V0 (Stage 2) = = 9.66
1.12968
7) Value of firm = Stage II + Stage II
= 2.4336
= 2.4336 + 9.66
= 12.09
Value of equity = Value of Firm – Value of Debt
= 12.09 – 8
= 4.09
Question 75 May 2018 (New) – Paper

Herbal World is a small, but profitable producer of beauty cosmetics using the plant Aloe Vera.
Though it is not a high‐tech business, yet Herbal's earnings have averaged around Rs.18.5 lakh after
tax, mainly on the strength of its patented beauty cream to remove the pimples.
The patent has nine years to run, and Herbal has been offered Rs.50 lakhs for the patent rights.
Herbal's assets include Rs.50 lakhs of property, plant and equipment and Rs.25 lakhs of working
capital. However, the patent is not shown in the books of Herbal World. Assuming Herbal's cost of
capital being 14 percent, calculate its Economic Value Added (EVA).
Solution :
EVA = NOPATA – WACC x Capital Employed.
Capital Employed Rs.lacs
Property, etc. 50
Working Capital 25
Patent Value 50
65 | P a g e
Effective or Invested Capital 125

WACC x CE = 14% x Rs.125 lacs = Rs.17.5 lacs
EVA = Rs.18.5 lacs – Rs.17.5 lacs = Rs.1 lac

An established company is going to be de merged in two separate entities. The valuation of the
company is done by a well‐known analyst. He has estimated a value of Rs.5,000 lakhs, based on the
expected free cash flow for next year of Rs.200 lakhs and an expected growth rate of 5%. While going
through the valuation procedure, it was found that the analyst has made the mistake of using the
book values of debt and equity in his calculation. While you do not know the book value weights he
used, you have been provided with the following information:
(i) The market value of equity is 4 times the book value of equity, while the market value of debt
is equal to the book value of debt,
(ii) Company has a cost of equity of 12%,
(iii) After tax cost of debt is 6%.
You are required to advise the correct value of the company.
Solution :
FCFF1
Value of the Company = ,
Kc  g
200
5000 =
Kc  0.05
Kc = 9%
We do not know the weights the analyst had taken for arriving at the cost of capital. Let w be the
proportion of equity. Then, (1‐w) will be the proportion of debt.
Kc = 9 = w x 12 + (1‐w) x 6
9 = 6 + 6w
6w =3
Hence w = 3/ 6 = 0.5 = 50 % or 1:1
The weights are equal i.e. 1:1 for equity and debt.
The correct weights should be market value of equity : market value of debts.
i.e. 4 times book value of equity : book value of debts. i.e. 4:1 equity : debt
Revised Kc = 4/5 x 12 + 1/5 x 6= 10.8 %
Revised value of the company = = 200 / 5.8% = 3448.28 lacs.
.
Similar to ‐ Question 68 ‐ May 2017 – RTP
66 | P a g e
The risk free rate of return is 5 percent. The expected rate of return on the market portfolio is 11
percent. The expected rate of growth in dividend of X Ltd. is 8 percent. The last dividend paid was
Rs.2.00 per share. The beta of X Ltd. equity stock is 1.5
(i) What is the present price of the equity stock of X Ltd.?
(ii) How would the price change when
• The inflation premium increases by 3 percent?
• The expected growth rate decreases by 3 percent?
• The beta decreases to 1.3?
Solution :
(i) Present Price of Stock
Re = Rf + β(Rm ‐ Rf)
= 5 + 1.5(11 ‐ 5)
= 5 + 9= 14%
D1 . .
IV = Re ‐ g = = Rs.36/share
. .
(ii) Inflation premium = 3%

Rf = 5 x 1.03 = 5.15%
g = 8 – 3 = 5%
β = 1.3
Re = 5.15 + 1.3(11 – 5.15) = 12.755%
D1 . .
IV = Re ‐ g = = Rs.27.81/share
. .

Pragya Limited has issued 75,000 equity shares of Rs.10 each. The current market price per share is
Rs.24. The company has a plan to make a rights issue of one new equity share at a price of Rs.16 for
every four share held.
(i) Calculate the theoretical post‐rights price per share;
(ii) Calculate the theoretical value of the right alone;
(iii) Show the effect of the rights issue on the wealth of a shareholder, who has 1,000 shares
assuming he sells the entire rights; and
(iv) Show the effect, if the same shareholder does not take any action and ignores the issue.
Solution :
(i) Calculation of theoretical Post‐rights (ex‐right) price per share:
Ex‐Right Value =
Where,
M = Market price,
N = Number of old shares for a right share
67 | P a g e
S = Subscription price
R = Right share offer
= = Rs.22.40
(ii) Calculation of theoretical value of the rights alone:
= Ex‐right price – Cost of rights share
= Rs.22.40 – Rs.16
= Rs.6.40
(iii) Calculation of effect of the rights issue on the wealth of a shareholder who has 1,000 shares
assuming he sells the entire rights:
Rs.
(a) Value of shares before right issue 24,000
(1,000 shares × Rs.24)
(b) Value of shares after right issue 22,400
(1,000 shares × Rs.22.40) 1,600
Add: Sale proceeds of rights renunciation
(250 shares × Rs.6.40)
24,000
There is no change in the wealth of the shareholder even if he sells his right.
(iv) Calculation of effect if the shareholder does not take any action and ignores the issue:
Rs.
Value of shares before right issue 24,000
(1,000 shares × Rs.24)
Value of shares after right issue 22,400
(1,000 shares × Rs.22.40)
Loss of wealth to shareholders, if rights ignored 1,600

X Limited, just declared a dividend of Rs.14.00 per share. Mr. B is planning to purchase the share of
X Limited, anticipating increase in growth rate from 8% to 9%, which will continue for three years. He
also expects the market price of this share to be Rs.360.00 after three years.
You are required to determine:
(i) the maximum amount Mr. B should pay for shares, if he requires a rate of return of 13% per
annum.
(ii) the maximum price Mr. B will be willing to pay for share, if he is of the opinion that the 9%
growth can be maintained indefinitely and require 13% rate of return per annum.
(iii) the price of share at the end of three years, if 9% growth rate is achieved and assuming other
conditions remaining same as in (ii) above.
Calculate rupee amount up to two decimal points.
68 | P a g e
Year 1 Year 2 Year 3

FVIF @ 9% 1.090 1.188 1.295
FVIF @ 13% 1.130 1.277 1.443
FVIF @ 13% 0.885 0.783 0.693
Solution :
(i) Expected dividend for next 3 years.
Year 1 (D1) Rs.14.00 (1.09) = Rs.15.26
Year 2 (D2) Rs.14.00 1.09 = Rs.16.63
Year 3 (D3) Rs.14.00 1.09 = Rs.18.13
Required rate of return = 13% (Ke)
Market price of share after 3 years = (P3) = Rs.360
The present value of share
= + + +
. . .
= + + +
. . . .
= 15.26(0.885) + 16.63(0.783) +18.13(0.693) + 360(0.693)
= 13.50 + 13.02 + 12.56 + 249.48
= Rs.288.56
(ii) If growth rate 9% is achieved for indefinite period, then maximum price of share should Mr.
A willing be to pay is
. . . .
= = = = Rs.381.50
. . .
(iii) Assuming that conditions mentioned above remain same, the price expected after 3 years will
be:
. . . .
= = = = = Rs.494
. . . .

Eager Ltd. has a market capitalization of Rs.1,500 crores and the current market price of its share is
Rs.1,500. It made a PAT of 200 crores and the Board is considering a proposal to buy back 20% of the
shares at a premium of 10% to the current market price. It plans to fund this through a 16% bank
loan. You are required to calculate the post buy back Earnings Per Share (EPS). The company’s
corporate tax rate is 30%
Solution
A. Market Cap 1500
B. MPS 1500
C. No (Cap/MPS) 1 crore
D. No. of shares to be brought back = 1 x 0.2 = 0.2 crore
E. Funds needed = 0.20 x 1650 (1500 + 10%) = 330 crore
F. Interest post tax = 330 x 16% x 70% = 36.96
G. PAT after buy back = 200 – 36.96 = 163.04
69 | P a g e
.
H. EPS = = = Rs.203.80
.

A company has an EPS of Rs.2.5 for the last year and the DPS of Rs.1. The earnings is expected to
grow at 2% a year in long run. Currently it is trading at 7 times its earnings. If required rate of return
is 14%, compute the following:
(i) An estimate of the P/E ratio using Gordon growth model.
(ii) The Long term growth rate implied by the current P/E ratio.
Solution :
1. PE using Gordon growth
.
IV = = = 8.5
. .
.
PE = = = 3.4 times
.
2. Current PE = 7 times
MPS = 2.5 x 7 = 17.5
Assuming market is at equilibrium
17.5 =
.
2.45 – 17.5g = 1 + 1g
1.45 = 18.5g
g = 7.84%

AMKO limited has issued 75,000 equity shares of Rs.10 each. The current market price per share is
Rs.36. The company has a plan to make a rights issue of one new equity share at a price of Rs.24 for
every four shares held.
(i) Calculate the theoretical post rights price per share
(ii) Calculate the theoretical value of the rights alone.
Solution :
1. No. of shares to be issued = = 18750
2. Priced at Rs.24
3. Ex Right Price =
, , , ,
= = Rs.33.6
,
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4. Value of Right = 33.6 – 24

= 9.6
Question 84 Nov 2018 (New) – RTP

ABC Limited’s shares are currently selling at Rs.13 per share. There are 10,00,000 shares outstanding.
The firm is planning to raise Rs.20 lakhs to Finance a new project.
(i) CALCULATE the ex‐right price of shares and the value of a right, if the firm offers one right
share for every two shares held.
(i) CALCULATE the ex‐right price of shares and the value of a right, if the firm offers one right
share for every four shares held.
(ii) ANALYSE how does the shareholders’ wealth change from (i) to (ii) above and right issue
increases shareholders’ wealth?
Solution :
(i) Number of shares to be issued: 5,00,000
20,00,000
Subscription price =4
5,00,000
1,30,00,000  20,00,000
Sh. Price after right = = 10
15,00,000
Or = Rs.10 – Rs.4 = Rs.6
20,00,000
(ii) Subscription price = Rs.8
2,50,000
1,30,00,000  20,00,000
Ex‐right Price = Rs.12
12,50,000
Or = Rs.12 – Rs.8 = Rs.4
(iii) The effect of right issue on wealth of Shareholder’s wealth who is holding, say 100 shares.
(a) When firm offers one share for two shares held.
Value of Shares after right issue (150 × Rs.10) Rs.1,500
Less: Amount paid to acquire right shares (50 × Rs.4) Rs.200
Rs.1,300
(b) When firm offers one share for every four shares held.
Value of Shares after right issue (125 × Rs.20) Rs.1,500
Less: Amount paid to acquire right shares (25 × Rs.8) Rs.200
Rs.1,300
(c) Wealth of Shareholders before Right Issue Rs.1,300
Thus, there will be no change in the wealth of shareholders from (i) and (ii).
71 | P a g e

Piyush Loonker and Associates presently pay a dividend of Re. 1.00 per share and has a share price
of Rs. 20.00.
(i) CALCULATE the firm’s expected or required return on equity using a dividend‐discount model
approach if this dividend were expected to grow at a rate of 12% per annum forever.
(ii) CALCULATE the firm’s expected, or required, return on equity if instead of this situation in
part (i), suppose that the dividends were expected to grow at a rate of 20% per annum for 5
years and 10% per year thereafter.
Solution :
(i) Firm’s Expected or Required Return on Equity
D1
Iv =
Re  g
1.12
20 =
Re  0.12
Re = 17.6%
(ii) Firm’s Expected or Required Return on Equity
(If dividends were expected to grow at a rate of 20% per annum for 5 years and 10% per
year thereafter)
Year Div PV @18%
1 1.2 1.017
2 1.44 1.034
3 1.728 1.052
4 2.0736 1.07
5 2.488 1.08
5.261
2.488(1.2)
IV5 = = 37.32
0.18  0.10
37.32
IV0 = = 16.31
1.185
Total = 5.261 + 16.31
= 21.57720
Since the PV is 720. Lets increase the Re to 20%
Year Div PV @20%

1 1.2 1
2 1.44 1
3 1.728 1
4 2.0736 1
5 2.488 1
5
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2.488(1.2)
IV5 = = 29.856
0.20  0.10
29.856
IV0 = = 12
1.25
Total = 17 < 20
Since PV is > 20. We shall use IRR to calculate Re.

NPV at LR
Ke = LR +  r
NPV at LR - NPV at HR
(Rs.21.57 - Rs.20)
K = 18% + x 2%
Rs.21.57 - Rs.17
= 1.57 + 3
Rs.1.57
= 18% + x 2%
Rs.4.57
= 18.69%
Therefore, the firm’s expected, or required, return on equity is 18.10%. At this rate the present
discounted value of dividend stream is equal to the market price of the share.

Eagle Ltd. reported a profit of Rs.77 lakhs after 30% tax for the financial year 2016‐17. An analysis of
the accounts revealed that the income included extraordinary items of Rs.8 lakhs and an
extraordinary loss of Rs.10 lakhs. The existing operations, except for the extraordinary items, are
expected to continue in the future. In addition, the results of the launch of a new product are
expected to be as follows:
Rs.in lakhs
Sales 70
Material costs 20
Labour costs 12
Fixed costs 10
(i) CALCULATE the value of the business, given that the capitalization rate is 14%.
(iii) CALCULATE the market price per equity share, assuming Eagle Ltd.‘s share capital being
comprised of 1,00,000 13% preference shares of Rs.100 each and 50,00,000 equity shares of
Rs.10 each and the P/E ratio being 10 times.
Solution :
(i) Computation of Business Value
Rs.in lakhs
Profit before tax (77/1‐0.30) 110
Less: Extraordinary income (8)
Add: Extraordinary losses (10)
73 | P a g e
112
Profit from new product Rs.in lakhs
Sales 70
Less: Material costs 20
Labour costs 12
Fixed costs 10 (42) 28
140.00
Less: Taxed @ 30% 42.00
Future Maintainable Profits after taxes 98.00
Relevant Capitalisation Factor 0.14
Value of Business (Rs.98/0.14) 700
(ii) Computation of Market Price of Equity Share

Future Maintainable profits (After Tax) Rs.98,00,000
Less: Preference share dividends 1,00,000 shares of Rs.100 @ Rs.13,00,000
13%
Earnings available for Equity Shareholders Rs.85,00,000
No. of Equity Shares 50,00,000
. , , Rs.1.70
Earnings per share =
, ,
PE ratio 10
Market Price per share Rs.17
Question 87 Nov 2018 (New) – Paper

Shares of Volga Ltd. Are being quoted at a price – earning ratio 8 times. The company retains 50% of
its earnings per share. The company’s EPS is Rs.10.
You are required to determine
1. Cost of Equity to the company if the market expects a growth rate is 15% p.a.
2. The indicative market price with the same cost of capital and if the anticipated growth rate is
16% p.a
3. The market price per share if the company’s cost of capital is 20%p.a and the anticipated
growth rate is 18% p.a.
Solution :
Dividend = 10 x 50% = Rs.5 / share
MPS = EPS x PE = 10 x 8 = Rs.80 / share
1. Assuming market at Equilibrium MPS = IV
Intrinsic Value IV =
.
80 =
.
80 Re – 12 = 5.75
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Therefore Re = 22.1875%
2. Market Price with same cost of capital and Growth rate of 16%
.
IV = = = Rs.93.74 / share
. .
3. Market price of cost of capital is 20% and Growth is 18%.
.
IV = = = Rs.295 / share
. .
Question 88 Nov 2018 (New) – Paper

Income statement for the year ended 31st March, 2018
Particulars Amount
Sales 40,000
Gross Profit 12,000
Administrative Expenses 6,000
Profit Before Tax 6,000
Tax @ 30% 1,800
Profit After Tax 4,200
Balance sheet as on 31st March, 2018

Particulars Amount
Fixed Assets 10,000
Total 16,000
Equity share capital 15,000
Sundry Creditors 1,000
Total 16,000
The company is contemplating for new sales strategy as follows
1. Sales to grow by 30% per year for next 4 years
2. Assets turnover ratio, net profit ratio and tax rate will remain the same
3. Depreciation will be 15% of value of Asset at the beginning of the year
4. Required rate of return for the company is 15%
Evaluate the viability of new strategy
Solution :
1. Value of firm before strategy
VF = = = = Rs.28,000
%
2. Value of firm after strategy
Stage 1
Year 1 2 3 4 5
PAT 5460 7098 9227.4 11995.62 11995.62
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‐ NI 4500 5850 7605 9886.5 ‐

(⧍ in capital Employed)
FCFE 960 1248 1622.5 2109.12 11995.62

PV @ 15% 834.78 943.67 1066.82 1205.90 ‐
Total = 4051.17
Stage 2
.
VF4 = = = 79,970.8
.
.
VF0 = = 45,723.56
.
Total IV = 4,051.17 + 45,723.56 = 49,774.73
3. Value of Strategy = 49,774.73 – 28,000
= 21,774.74
Note: Since the value of strategy is positive we should implement the strategy.
2019
Question 89 : May 2019 (New) – RTP
Based on the credit rating of bonds, Mr. Z has decided to apply the following discount rates for valuing
bonds:
Credit Rating Discount Rate
AAA 364 day T bill rate + 3% spread
AA AAA + 2% spread
A AAA + 3% spread
He is considering to invest in AA rated, Rs.1,000 face value bond currently selling at Rs.1,025.86. The
bond has five years to maturity and the coupon rate on the bond is 15% p.a. payable annually. The
next interest payment is due one year from today and the bond is redeemable at par. (Assume the
364 day T‐bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z. Should he invests in the bond?
Also calculate the current yield and the Yield to Maturity (YTM) of the bond.
Solution :
The appropriate discount rate for valuing the bond for Mr. Z is:
R = 9% + 3% + 2% = 14%
Time CF PVIF 14% PV (CF) PV (CF)
1 150 0.877 131.55
2 150 0.769 115.35
3 150 0.675 101.25
4 150 0.592 88.80
5 1150 0.519 596.85
 PV (CF) i.e. P0 = 1033.80
76 | P a g e
Since, the current market value is less than the intrinsic value; Mr. Z should buy the bond. Current
yield = Annual Interest / Price = 150 / 1025.86 = 14.62%
The YTM of the bond is calculated as follows:
@15%
P = 150 × PVIFA 15%, 4 + 1150 × PVIF 15%, 5
= 150 × 2.855 + 1150 × 0.497 = 428.25 + 571.55 = 999.80
@14%
As found in sub part (a) P0 = 1033.80
By interpolation we get,
7.94 7.94
= 14% + × (15% – 14%) = 14% + %
7.94  (26.06) 34
YTM = 14.23%
Seawell Corporation, a manufacturer of do‐it‐yourself hardware and housewares, reported earnings
per share of € 2.10 in 2013, on which it paid dividends per share of €0.69. Earnings are expected to
grow 15% a year from 2004 to 2008, during this period the dividend payout ratio is expected to
remain unchanged. After 2018, the earnings growth rate is expected to drop to a stable rate of 6%,
and the payout ratio is expected to increase to 65% of earnings. The firm has a beta of 1.40 currently,
and is expected to have a beta of 1.10 after 2018. The market risk premium is 5.5%. The Treasury
bond rate is 6.25%.
(a) What is the expected price of the stock at the end of 2018?
(b) What is the value of the stock, using the two‐stage dividend discount model?
Solution :
1) Stage 1
Re = Rf + (Rm – Rf)
= 6.25 + 1.14(5.5) = 13.95%
Stage 2
= 6.25 + 1.1(5.5) = 12.3
2) Stage 1
Year EPS DPS @32.857% PV @13.95%
14 2.415 0.7935 0.696
15 2.777 0.9125 0.703
16 3.194 1.049 0.709
17 3.673 1.207 0.716
18 4.224 1.388 0.722
3.546
3) Stage 2
4.224  1.06  0.65
Vf18 = = 49.196
0.123  0.06
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46.196
Vf13 = = 24.045
1.13955
4) Total IV = 24.045 + 3.546
= 27.59

The valuation of Hansel Limited has been done by an investment analyst. Based on an expected free
cash flow of Rs.54 lakhs for the following year and an expected growth rate of 9 percent, the analyst
has estimated the value of Hansel Limited to be Rs.1800 lakhs. However, he committed a mistake of
using the book values of debt and equity. The book value weights employed by the analyst are not
known, but you know that Hansel Limited has a cost of equity of 20 percent and post tax cost of debt
of 10 percent. The value of equity is thrice its book value, whereas the market value of its debt is
ninetenths of its book value. What is the correct value of Hansel Ltd?
Solution :
FCFF1
1) Vf =
Kc  g
54
1800 =
Kc  0.09
Kc = 12%
2) Let the wt for debt be x
Equity =1–x
10x + 20(1 – x) = 12
10x + 20 – 20x = 12
x = 0.8
1–x = 0.2
3) The above were book value with the market value wts shall be
Debt 0.8  0.9 = 0.72
Equity 0.2  3 = 0.6
1 1.32
4) Kc based on market value wts
0.6 0.72
= 20  + 10  = 14.545%
1.32 1.32
FCFF1 54
5) Vf = = = Rs.973.85
Kc  g 0.14545 - 0.09
Question 92 : May 2019 (Old) – RTP

X Ltd. is a Shoes manufacturing company. It is all equity financed and has a paid‐tip Capital of
Rs.10,00,000 (Rs.10 per share).
X Ltd. has hired Swastika consultants to analyse the future earnings. The report of Swastika
consultants states as follows:
78 | P a g e
(i) The earnings and dividend will grow at 25% for the next two years.
(ii) Earnings are likely to grow at the rate of 10% from 3rd year and onwards.
(iii) Further, if there is reduction in earnings growth, dividend payout ratio will increase to 50%.
The other data related to the company are as follows:
Year EPS (Rs.) Net Dividend per share (Rs.) Share Price (Rs.)
2010 6.30 2.52 63.00
2011 7.00 2.80 46.00
2012 7.70 3.08 63.75
2013 8.40 3.36 68.75
2014 9.60 3.84 93.00
You may assume that the tax rate is 30% (not expected to change in future) and post tax cost of
capital is 15%.
By using the Dividend Valuation Model, calculate
(i) Expected Market Price per share
(ii) P/E Ratio.
Solution :
1) Stage 1
Year EPS DPS PV @15%
1 12 4.8 4.174
2 15 6 4.537
8.711
2) Stage 2
15  1.1  0.5
IV3 = = 165
0.15 - 0.1
165
IV0 = = 124.764
1.152
3) Total IV = 8.711 + 124.764 = 133.475
MPS 133 - 475
4) PE Rate = = = 13.9 times
EPS 9. 6
Question 93 : May 2019 (New) – Paper

Compute Economic Value Added (EVA) of Goodluck Ltd. From the following information :
Profit & Loss Statement
Particulars Rs. In Lakhs
(a) Income ‐
Revenue from Operations 2,000
(b) Expenses ‐
Direct Expenses 800
Indirect Expenses 400
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(c) Profit before interest & tax (a ‐ b) 800

(d) Interest 30
(e) profit before tax (c ‐ d) 770
(f) Tax 231
(g) Profit after tax (e ‐ f) 539
Balance Sheet
Particulars Rs. In Lakhs
Equity and Liabilities :
(a) Shareholders' Fund ‐
Equity Share Capital 1,000
Reserves & Surplus 600
(b) Non ‐ Current Liabilities ‐
Long Term Borrowings 200
(c) Current Liabilities 800
Total 2,600
Assets :
(a) Non ‐ Current Assets 2,000
(b) Current Assets 600
Total 2,600
Other Information :
(1) Cost of Debts is 15%.
(2) Cost of Equity (i.e. shareholders’ expected return) is 12%
(3) Tax Rate is 30%
(4) Bad Debts Provision of Rs.40 lakhs is included in indirect expenses and Rs.40 lakhs reduced
from receivables in current assets.
Solution :
EVA = NOPAT – Kc
1) NOPAT 2) Kc (%)
EBIT 800 Ke = 12%
+ RDD 40 Kd = 15%
Adjusted EBIT 840 Kc = w + Ke + w + Kd
1640 200
– Tax (30%) ___ =  12 +  15
1840 1840
NOPAT 588 = 12.33%
3) Kc(Amt)
= 1840  12.33% = 226.87
EVA = 588 – 226.87 = 361.128
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The shares of G Ltd. Are currently being traded at Rs.46. The company published its results for the
year ended 31st March 2019 and declared a dividend of Rs.5. The company made a return of 15% on
its capital and expects that to be the norm in which it operates. G Ltd. Also expects the dividends to
grow at 10% for the first three years and thereafter at 5%.
You are required to advise whether the share of the company is being traded at premium or discount.
PVIF @ 15% for the next 3 years is 0.870, 0.756 and 0.658 respectively.
Solution :
1) Stage 1
Year Div PV @15%
1 5.5 4.78
2 6.05 4.57
3 6.655 4.38
13.73
2) Stage 2
D4 6.655(1.05 )
IV3 = = = 69.8775
Re  g 0.15  0.05
69.8775
IV0 = = 45.95
1.153
Total IV = 45.95 + 13.73 = 59.68
Advise : Since MP = 46, the stock is under priced and investor should go lay.

ABB Ltd. has a surplus cash balance of Rs.180 lakhs and wants to distribute 50% of it to the equity
shareholders. The company decides to buyback equity shares. The company estimates that its equity
share price after re‐purchase is likely to be 15% above the buyback price. If the buyback route is
taken.
Other information is as under:
1. Number of equity shares outstanding at present (Face value Rs.10 each) is Rs.20 lakhs.
2. The current EPS is Rs.5.
You are required to calculate the following:
I. The price at which the equity shares can be re‐purchased, if market capitalization of the
company should be Rs.400 lakhs after buy back.
II. Number of equity shares that can be re‐purchased.
III. The impact of equity shares re‐purchase on the EPS, assuming that the net income remains
unchanged.
Solution :
(i) Let P be the buyback price decided by ABB Ltd.
Market Capitalisation after Buyback
400 lakhs = 1.15P (Original Shares – Shares Bought Back)
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 50% of 180 lakhs 

=  20lakhs  
 P 
= 23 lakhs  P – 90 lakhs  1.15
= 23 lakhs P – 130.50 lakhs
Again, 23 lakhs P – 130.50 lakhs
or 23 lakhs P = 400 lakhs + 130.50 lakhs
503.50
or P = = Rs.21.89 per share 503.5023
23
(ii) Number of Shares to be Bought Back :‐
Rs. 90 lakhs/ 21.89 = 4.111 lakhs (Approx.) or 411147 shares
(iii) Shares after buyback
= 20 lakhs – 4.111 lakhs = 15.889 lakhs
or 20,00,000 – 4,11,147 = 15,88,853 shares
EPS = 5  20 lakhs/ 15.889 lakhs = Rs.6.29
Thus, EPS of ABB Ltd., increases to Rs.6.29.
So, EPS of ABB Ltd. is increased by Rs.1.29 (6.29 – 5.00)

Following financial informations are available of XP Ltd. For the year 2018 :
Equity Share Capital (Rs.10 each) Rs.200 Lakh
Reserves and Surplus Rs.600 Lakh
10% Debentures (Rs.100 each) Rs.350 Lakh
Total Assets Rs.1200 Lakh
Assets Turnover Ratio 2 times
Tax Rate 30%
Operating Margin 10%
Dividend Payout Ratio 20%
Current Market Price per Equity Share Rs.28
Required Rate of Return of Investors 18%
You are required to :
(i) Prepare Income Statement for the year 2018.
(ii) Determine its Sustainable Growth Rate.
(iii) Determine the fair price of the company’s share using Dividend Discount Model.
(iv) Give your opinion on investment in the company’s share at current price.
Solution :
1) Income statements
Sales (1200  2) 2400
– Operating cost 2160
Operating margin (10%) 240
– Interest 35
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EBT 205
– Tax (30%) 61.5
EAT 143.5
– Dividend (143.5  20%) 28.7
Retained earnings 114.8
2) G = br
b = Retention Ratio = 100 – Payout = 80%
PAT 143.5
r = roe = = = 17.9375
Equation 800
G = 80 17.9375% = 14.35%
D1 28.7
3) IV = D1 =  1.1435 = 1.6409
Re  g 20
1.6409
IV = = Rs.44.96/sh.
0.18 - 0.1435
4) Opinion = MP = 28, the stock is underpriced the investor should go long.
Question 97 : May 2019 (Old) – Paper

Equity of KGF Ltd. (KGFL) is Rs.410 Crores, its debt is worth Rs.170 Crores. Printer Division segments
value is attributable to 74%, which has an Asset Beta (P) of 1.45, balance value is applied on Spares
and Consumables Division, which has an Asset beta (SC) of 1.20 KGFL Debt beta (D) is 0.24.
You are required to calculate :
(i) Equity Beta (E).
(ii) Ascertain Equity Beta (E). If KFG Ltd. decides to change its Debt Equity position by raising
further debt and buying back of equity to have its Debt Equity Ratio at 1.90. Assume that the
present Debt Beta (D1) is 0.35 and any further funds raised by way of Debt will have a Beta
(D2) of 0.40.
(iii) Whether the new Equity Beta (E) justifies increase in the value of equity on account of
leverage?
Solution :
A) A = L
A = 1.45 74% + 1.2  26% = 1.385
L = 1.385
L = w + E + w + D
170 410
1.385 =  0.24 + E
580 580
1.314655 = 0.70689655 E
E = 1.860
B) E = ? New Debt : Equity = 1.90, D = 0.35 New D = 0.40
Existing capital = 580
83 | P a g e
Existing Debt = 170

New Debt Equity = 1.9 : 1
1 .9
New Debt = 580  = 380
2 .9
New funds revised by debt = 380 – 170 = 210.
170 210
D =  0.35 +  0.4 = 0.38
380 380
Total Capital Remains at 580
L = 1.385
L = wtE + wtD
200 380
1.385 =  E +  0.38
580 580
E = 3.29
C) Since E will increase cost of equity i.e. Re will also increase, it will decrease the value of
equity.

The closing price of LX Ltd. Is Rs.24 per share as on 31st March, 2019 on NSE Ltd. The Price Earnings
Ratio was 6. It was found that an amount of Rs.24 Lakhs as income and an extra ordinary loss of Rs.9
lakhs were included in the books of accounts. The existing operations except for the extraordinary
items are expected to continue in future. Further the company has launched a new product during
the year with the following expectations :
(Rs. In Lakhs)
Sales 150
Material Cost 40
Labour cost 34
Fixed Cost 24
The company has 500,000 equity shares of Rs.10 each and 100,000 9% Preference Shares of Rs.100
each. The price Earnings Ratio is 6 times. Post tax cost of capital is 10 per cent per annum. Tax rate is
34 per cent.
You are required to determine :
(i) Existing Profit from old operations
(ii) The value of business
Solution :
24
A) Existing profits for equity = = 4  500000
6
= 20,00,000
+ Preference div. 9,00,000
PAT 29,00,000 66%
+ Tax _________ 34%
84 | P a g e
PBT 43,93,939
–Ext. Income 24,00,000
+ Ext. Loss 9,00,000
28,93,939
B) New Business
Sales 150
– MC 40
– LC 34
– 24
52
C) Total = 30,93,939
– Tax __ 34%
53,42,000
5342000
D) Value of Business = = 5,34,20,000
0. 1

An investor is considering purchasing the equity shares of Lx Ltd., whose current market price (CMP)
is 150. The company is proposing a dividend of Rs.6 for the next year. LX is expected to grow @ 18
per cent per annum for the next four years. The growth will decline linearly to 14 per cent per annum
after first four years. Thereafter, it will stabilize at 14 per cent per annum infinitely. The required rate
of return is 18 per cent per annum.
You are required to determine :
(i) The intrinsic value of one share
(ii) Whether it is worth to purchase the share at this price
t 1 2 3 4 4 5 6 7
PVIF (18, t) 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266
Solution :
(i) Stage 1
Year Div. PV @18%
1 6 5.085
2 7.08 5.085
3 8.3544 5.085
4 9.858 5.085
20.34
Stage 2
D5 9.858(1.14)
IV4 = = = 280.953
Re - g 0.18  0.14
280 .953
IV0 = = 144.91
1.18 4
Total IV = 144.91 + 20.34 = 165.25
(ii) The CMP = 150, share is underpriced in market and therefore we should Buy.
Question 100 : Nov 2019 (New) – RTP
85 | P a g e
A hypothetical company ABC Ltd. issued a 10% Debenture (Face Value of Rs.1000) of the duration of
10 years is currently trading at Rs.850 per debentnure. The bond is convertible into 50 equity shares
being currently quoted at Rs.17 per share.
If yield on equivalent comparable bond is 11.80%, then calculate the spread of yield of the above
bond from this comparable bond.
The relevant present value table is as follows.
Present Values t1 t2 t3 t4 t5 t6 t7 t8 t9 t10
PVIF0.11, t 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352
PVIF0.13, t 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295
Solution :
Conversion Price = Rs.50 x 17 = rs.850
Intrinsic Value = Rs.850
Accordingly the yield (r) on the bond shall be:
Rs.850 = Rs.100 PVAF (r, 10) + Rs.1000 PVF (r, 10)
Let us discount the cash flows by 11%
850 = 100 PVAF (11%, 10) + 1000 PVF (11%, 10)
850 = 100 x 5.890 + 1000 x 0.352
= 91
Now let us discount the cash flows by 13%
850 = 100 PVAF (13%, 10) + 1000 PVF (13%, 10)
850 = 100 x 5.426 + 1000 x 0.295
= –12.40
Accordingly, IRR
90.90
11% + × (13% –11%)
90.90  (12.40)
90.90
11% + ×( 13% –11%)
103.30
= 12.76%
The spread from comparable bond = 12.76% – 11.80% = 0.96%

Mr. A is thinking of buying shares at Rs.500 each having face value of Rs.100. He is expecting a bonus
at the ratio of 1 : 5 during the fourth year. Annual expected dividend is 20% and the same rate is
expected to be maintained on the expanded capital base. He intends to sell the shares at the end of
seventh year at an expected price of ` 900 each. Incidental expenses for purchase and sale of shares
are estimated to be 5% of the market price. He expects a minimum return of 12% per annum.
Should Mr. A buy the share? If so, what maximum price should he pay for each share? Assume no tax
on dividend income and capital gain.
Solution :
86 | P a g e
P.V. of dividend stream and sales proceeds

Year Dividend / Sale PVF (12%) PV (Rs.)
1 Rs.20/‐ 0.893 17.86
2 Rs.20/‐ 0.797 15.94
3 Rs.20/‐ 0.712 14.24
4 Rs.24/‐ 0.636 15.26
5 Rs.24/‐ 0.567 13.61
6 Rs.24/‐ 0.507 12.17
7 Rs.24/‐ 0.452 10.85
7 Rs.1026/‐ (Rs.900 x 1.2 x 0.95) 0.452 463.75
Rs.563.68
Less : Cost of Share (Rs.500 x 1.05) Rs.525.00
Net gain Rs.38.68
Since Mr. A is gaining Rs.38.68 per share, he should buy the share.
Maximum price Mr. A should be ready to pay is Rs.563.68 which will include incidental expenses. So
the maximum price should be Rs.563.68 x 100/105 = Rs.536.84

A valuation done of an established company by a well‐known analyst has estimated a value of Rs.500
lakhs, based on the expected free cash flow for next year of Rs.20 lakhs and an expected growth rate
of 5%.
You are required to estimate the correct value of the company.
Solution :
Cost of capital by applying Free Cash Flow to Firm (FCFF) Model is as follows:‐
FCFF1
Value of Firm = V0 =
Kc  gn
Where –
FCFF1 = Expected FCFF in the year 1
Kc = Cost of capital
gn = Growth rate forever
Thus, Rs.500 lakhs = Rs.20 lakhs /(Kc – g)
Since g = 5%, then Kc = 9%
Now, let X be the weight of debt and given cost of equity = 12% and cost of debt = 6%, then 12%
(1 – X) + 6% X = 9%
87 | P a g e
Hence, X = 0.50, so book value weight for debt was 50%

Correct weight should be 150% of equity and 50% of debt.
Cost of capital = Kc = 12% (0.75) + 6% (0.25) = 10.50%
and correct firm’s value = Rs.20 lakhs/(0.105 – 0.05) = Rs.363.64 lakhs.
Question 103 : Nov 2019 (New) – Paper

th th
Closing values of BSE Sensex from 6 to 17 day of the month of January of the year 20xx were as
follows :
Days Date Day Sensex
1 6 Thu 34522
2 7 Fri 34925
3 8 Sat No Trading
4 9 Sun No Trading
5 10 Mon 35222
6 11 Tue 36000
7 12 Wed 36400
8 13 Thu 37000
9 14 Fri No Trading
10 15 Sat No Trading
11 16 Sun No Trading
12 17 Mon 38000
Calculate Exponential Moving Average (EMA) of Sensex during the above period. The 30 days simple
moving average of Sensex can be assumed as 35,000. The value if exponent for 30 days EMA is 0.064.
Provide analyzed conclusion on the basis of your calculations.
(Calculations should be up to three decimal points.)

Following information is available of M/s.TS Ltd.
(Rs. in crores)
PBIT 5.00
Less : Interest on Debt. (10%) 1.00
PBT 4.00
Less : Tax @ 25% 1.00
PAT 3.00
No. of outstanding shares of Rs.10 each 40 lakh
EPS (Rs.) 7.5
Market price of share (Rs.) 75
P/E Ratio 10 Times
TS Ltd. Has an undistributed reserves of Rs.8 crores. The company requires Rs.3 crores for the
purpose of expansion which is expected to earn the same rate of return on capital employed as
present. However, if the debt to capital employed ratio is higher than 35%, then P/E ratio is expected
88 | P a g e
to decline to 8 Times and rise in the cost of additional debt to 14%. Given this data which of the
following options the company would prefer, and why?
Option (i) : If the required amount is raised through debt, and
Option (ii) : If the required amount is raised through equity and the new shares will be issued at a
price of Rs.25 each.

Mr.X, a financial analyst, intends to value the business of PQR Ltd. In terms of the future cash
generating capacity. He has projected the following after tax cash flows :
Year : 1 2 3 4 5
Cash flows (Rs. in lakhs) 1,760 480 640 860 1,170
th
It is further estimated that beyond 5 year, cash flows will perpetuate at a constant growth rate of
8% per annum, mainly on account of inflation. The perpetual cash flow is estimated to be Rs.10,260
lakh at the end of the 5th year.
Question 106 : Nov 2019 (Old) – Paper

XY Ltd., a Cement manufacturing company has hired you as a financial consultant of the company.
The Cement Industry has been very stable for some time and the cement companies SK Ltd. and AS
Ltd. are similar in size and have similar product market mix characteristic. Use comparable method
to value the equity of XY Ltd. In performing analysis, use the following ratios :
(i) Market to book value (ii) Market to replacement cost
(iii) Market to sales (iv) Market to Net income
The following data are available for your analysis :
SK Ltd. AS Ltd. XY Ltd.
Market Value 450 400
Book Value 400 300 250
Replacement Cost 600 550 500
Sales 550 450 500
Net Income 18 16 14

The current EPS of M/s.VEE Ltd. is Rs.4. The company has shown an extraordinary growth of 40% in
its earnings in the last few years. This high growth is likely to continue for the next 5 years after which
growth rate in earnings will decline from 40% to 10% during the next 5 years and remain stable at
10% thereafter. The decline in the growth rate during the five year transition period will be equal to
linear. Currently, the company’s pay‐out ratio is 10%. It is likely to remain the same for the next five
years and from the beginning of the sixth year till the end of the 10th year, the pay‐out will linearly
increase and stabilize at 50% at the end of the 10th year. The post tax cost of capital is 17% and the
PV factors are given below :
Years 1 2 3 4 5 6 7 8 9 10
PVIF @17% 0.855 0.731 0.625 0.534 0.456 0.390 0.333 0.285 0.244 0.209
89 | P a g e
You are require to calculate the intrinsic value of the company’s stock based on expected dividend.
If the current market price of the stock is Rs.125, suggest if it is advisable for the investor to invest in
the company’s stock or not.

You are interested in buying some equity stocks of RK Ltd. The company has 3 divisions operating in
different industries. Division A captures 10% of its industries sales which is forecasted to be Rs.50
crore for the industry. Division B and C captures 30% and 2% of their respective industry’s sales, which
are expected to be Rs.20 crore and Rs.8.5 crore respectively. Division A traditionally had a 5% net
income margin, whereas divisions B and C had 8% and 10% net income margin respectively. RK Ltd.
has 3,00,000 shares of equity stock outstanding, which sell at Rs.250.
The company has not paid dividend since it started its business 10 years ago. However from the
market sources you come to known that RK Ltd. will start paying dividend in 3 years time and the
pay‐out ratio is 30%. Expecting this dividend, you would like to hold the stock for 5 years. By analyzing
the past financial statements, you have determined that RK Ltd’s required rate of return is 18% and
that P/E ratio of 10 for the next year and on ending P/E ratio of 20 at the end of the fifth year are
appropriate.
Required :
(i) Would you purchase RK Ltd. equity at this time based on your one year forecast?
(ii) If you expect earnings to grow @15% continuously, how much are you willing to pay for the
stock of RK Ltd.?
Ignore taxation.
PV Factors are given below :
Years 1 2 3 4 5
PVIF @18% 0.847 0.718 0.609 0.516 0.437
2020
Calculate the value of share from the following information:
Profit after tax of the company Rs.290 crores
Equity capital of company Rs.1,300 crores
Par value of share Rs.40 each
Debt ratio of company (Debt/ Debt + Equity) 27%
Capital expenditure per share Rs.47
Depreciation per share Rs.39
Change in Working capital Rs.3.45 per share
Solution :
90 | P a g e
Rs.1,300crores
No. of Shares = = 32.5 Crores
Rs.40
PAT
EPS =
No. of shares
Rs.290 crores
EPS = = Rs.8.923
32.5 crores
FCFE = Net income – [(1 – b) (capex – dep) + (1 – b) (WC)]
FCFE = 8.923 – [(1 – 0.27) (47 – 39) + (1 – 0.27) (3.45)]
= 8.923 – [5.84 + 2.5185] = 0.5645
Cost of Equity = Rf +  (Rm – Rf)
= 8.7 + 0.1 (10.3 – 8.7) = 8.86%
FCFE(1  g) 0.5645(1.08) 0.60966
P0 = =  = Rs.70.89
Ke  g 0.0886  .08 0.0086

ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They want to know
the value of the new strategy. Following information relating to the year which has just ended, is
available:
Income Statement Rs.
Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Fixed Assets 8,000
Equity 12,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The gross
margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will remain
unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year.
The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
Solution :
Projected Balance Sheet
Fixed Assets (40% of Sales) 9,600 11,520 13,824 13,824
Current Assets (20% of Sales) 4,800 5,760 6,912 6,912
Total Assets 14,400 17,280 20,736 20,736
91 | P a g e
Equity 14,400 17,280 20,736 20,736
Projected Cash Flows :‐

Sales 24,000 28,800 34,560 34,560
PBT (10% of sale) 2,400 2,880 3,456 3,456
PAT (70%) 1,680 2,016 2,419.20 2,419.20
Depreciation 800 960 1,152 1,382
Addition to Fixed Assets 2,400 2,880 3,456 1,382
Increase in Current Assets 800 960 1,152 ‐
Operating cash flow (FCFF) (720) (864) (1,036.80) 2,419.20
Projected Cash Flows :‐

Present value of Projected Cash Flows :‐
Cash Flows PVF at 15% PV
–720 0.870 –626.40
–864 0.756 –653.18
–1,036.80 0.658 –1,961.79
Residual Value = 2419.20/0.15 = 16,128

Present value of Residual value = 16128/(1.15)3
= 16128/1.521 = 10603.55
Total shareholders’ value = 10,603.55 – 1,961.79 = 8,641.76
Pre strategy value = 1,400 / 0.15 = 9,333.33
Value of strategy = 8,641.76 – 9,333.33 = – 691.57
Conclusion : The strategy is not financially viable.

X Ltd. is a Shoes manufacturing company. It is all equity financed and has a paid‐tip Capital of
Rs.10,00,000 (Rs.10 per share)
X Ltd. has hired Swastika consultants to analyse the future earnings. The report of Swastika
consultants states as follows:
(i) The earnings and dividend will grow at 25% for the next two years.
(ii) Earnings are likely to grow at the rate of 10% from 3rd year and onwards.
(iii) Further, if there is reduction in earnings growth, dividend payout ratio will increase to 50%.
The other data related to the company are as follows:
Year EPS (Rs.) Net Dividend per share (Rs.) Share Price (Rs.)
2010 6.30 2.52 63.00
2011 7.00 2.80 46.00
2012 7.70 3.08 63.75
2013 8.40 3.36 68.75
2014 9.60 3.84 93.00
92 | P a g e
You may assume that the tax rate is 30% (not expected to change in future) and post‐tax cost of
capital is 15%.
By using the Dividend Valuation Model, calculate
(a) Expected Market Price per share
(b) P/E Ratio.
Solution :
D1
(a) The formula for the Dividend valuation Model is P0 =
Ke  g
g = Growth rate
D1 = Dividend at the end of year 1
On the basis of the information given, the following projection can be made:
Year EPS (Rs.) DPS (`) PVF @15% PV of DPS (Rs.)
2015 12.00 (9.60 x 125%) 4.80(3.84 x 125%) 0.870 4.176
2016 15.00(12.00 x 125%) 6.00(4.80 x 125%) 0.756 4.536
2017 16.50(15.00 x 110%) 8.25*(50% of Rs.16.50) 0.658 5.429
14.141
*Payout Ratio changed to 50%.
After 2017, the perpetuity value assuming 10% constant annual growth is :
D1 = Rs.8.25 × 110% = Rs.9.075
Therefore Po from the end of 2017
This must be discounted back to the present value, using the 3 year discount factor after 15%.
Rs.
Present Value of P0 (` 181.50 × 0.658) 119.43
Add: PV of Dividends 2015 to 2017 14.14
Expected Market Price of Share 133.57
(b) P/E Ratio
Expected Market Price of Shares (P1 )
P/E Ratio =
EPS
Rs.133.57
= = Rs.13.91
Rs.9.60
Similarly to Question 8 – Nov 2009 – Paper – 6 Marks

93 | P a g e

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SFM COMPILER Equity Analysis & Valuation

CHP ‐ 1 EQUITY ANALYSIS AND VALUATION

Years May Nov

β Liabilities = Wt β Equity + wt β Debt

Question 2 Nov 2008 RTP

Question 3 Nov 2008 RTP

Iv for Next Years (Stage 2)

Total Iv (Stage 1 + Stage 2) = 5 + 11 = 16

Iv for Next Years (Stage 2)

Total IV (Stage 1 + Stage 2) = 20.21 which is a bit higher than 20

Question 5 May 2009 Paper – 6 Marks

Long run growth rate of the company 8%

Question 6 Nov 2009 RTP

*Interest P = €100,000(0.80)  0.14 = €11,200

Question 7 Nov 2009 RTP

Question 8 Nov 2009 Paper – 6 Marks

Assets Turnovers ratio 1.1

Question 9 Nov 2009 Paper – 6 Marks

Question 11 May 2010 RTP

Share Price Rs.66 per share

EBIT 245 264.6 285.768 308.629 333.32 359.98

Patent rights Rs.40 lakhs

Question 13 May 2010 Paper – 12 Marks

*Interest P = €100,000(0.80)  0.14 = €11,200

Question 14 Nov 2010 ‐ RTP

Question 15 Nov 2010 – RTP

Question 16 Nov 2010 Paper – 5 Marks

Question 17 Nov 2010 Paper – 8 Marks

Question 18 Nov 2010 Paper – 8 Marks

Question 20 May 2011 RTP

Question 21 May 2011 ‐ RTP

Question 22 May 2011 ‐ Paper – 8 Marks

Question 24 Nov 2011 ‐ RTP

Question 25 Nov 2011 – RTP

Question 26 Nov 2011 Paper – 5 Mark

Question 27 Nov 2011 Paper – 8 Marks

Similar to ‐ Question 15 – Nov 2010 – RTP

Question 28 Nov 2011 ‐ Paper – 8 Marks

Tax @ 35% 56.70

Question 30 May 2012 RTP

Base year information:

Question 31 May 2012 RTP

2. Firm offer one right share for 2 shares held

Question 33 May 2012 Paper – 6 Marks

Question 34 Nov 2012 RTP

3) Calculation for NOPAT

4) Calculation for Net Investments

Question 35 Nov 2012 Paper – 12 Marks

Question 37 Nov 2012 ‐ Paper – 8 Marks

Profit After Tax 77 Sales 70

Question 38 Nov 2012 ‐ Paper – 8 Marks

Question 39 Nov 2012 Paper – 8 Marks

Calculation of Revised Interest Coverage Ratio

Question 40 Nov 2012 ‐ Paper – 8 Marks

Question 43 Nov 2013 – RTP – Similar to ‐ Question 6 ‐ Nov 2009 RTP

Question 44 Nov 2013 ‐ Paper – 8 Marks

Question 46 May 2014 ‐ Paper – 5 Marks

Question 47 May 2014 Paper – 8 Marks

(ii) Net Investment = Capital Spending – Depreciation + Change in Working Capital

Base Year 1 Year 2 Year 3 Year 4